Adjustable-rate mortgage
Okay kiddo, so you know how when you borrow money to buy a toy, you have to pay back the money plus some extra called interest?
Well, when grown-ups borrow money to buy a house, they have to do the same thing. But sometimes, they can choose to borrow the money at a special interest rate that can change over time. This is called an adjustable-rate mortgage, or ARM for short.
The special interest rate at the beginning might be lower than what they would pay with a regular mortgage, so it might be more affordable to buy a house. But the rate can change depending on something called a "index" (like a special number that measures how much interest is being charged by banks) and how often it changes (like every year or every month).
So, if the index goes up, the interest rate on the mortgage goes up too. And if the interest rate goes up, the monthly payment that grown-ups have to pay goes up too! But if the index goes down, the interest rate on the mortgage can go down too, which would make the monthly payment lower.
It's important to remember, though, that an adjustable-rate mortgage can be a bit risky, because the interest rate can go up a lot and make the monthly payment too expensive for grown-ups to afford. So, they should only choose an ARM if they're sure they can still afford it even if the interest rate goes up.
Does that make sense, little one?
Well, when grown-ups borrow money to buy a house, they have to do the same thing. But sometimes, they can choose to borrow the money at a special interest rate that can change over time. This is called an adjustable-rate mortgage, or ARM for short.
The special interest rate at the beginning might be lower than what they would pay with a regular mortgage, so it might be more affordable to buy a house. But the rate can change depending on something called a "index" (like a special number that measures how much interest is being charged by banks) and how often it changes (like every year or every month).
So, if the index goes up, the interest rate on the mortgage goes up too. And if the interest rate goes up, the monthly payment that grown-ups have to pay goes up too! But if the index goes down, the interest rate on the mortgage can go down too, which would make the monthly payment lower.
It's important to remember, though, that an adjustable-rate mortgage can be a bit risky, because the interest rate can go up a lot and make the monthly payment too expensive for grown-ups to afford. So, they should only choose an ARM if they're sure they can still afford it even if the interest rate goes up.
Does that make sense, little one?
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