What is the exam-ready distinction?
| Official syllabus topic | Financing: Fixed-Rate and Adjustable-Rate Loans |
|---|---|
| Official PSI area | Financing |
| Published weight | 10% of the 100-question national portion |
| Source edition | PSI Georgia Candidate Information Bulletin dated July 1, 2026 |
The Rule
PSI publishes a weight for the complete official area, not a guaranteed count for this individual comparison. Use the source, document, actor, event, and timing stated in the question before applying a memorized definition.
Side-by-side comparison
Read across each row. The terms are deliberately compared on identical dimensions so the difference remains clear when the exam hides the vocabulary inside a scenario.
| Decision dimension | Fixed-rate | Adjustable-rate |
|---|---|---|
| Interest rate | Contract rate remains fixed for the term | Can change after the initial period under the note |
| Rate formula | Stated rate | Index plus margin, subject to caps and other terms |
| Payment stability | Principal-and-interest structure is predictable when fully amortized | Payment can change when rate changes and may be affected by other features |
| Main risk | Initial rate may be higher than an ARM offer | Future rate and payment uncertainty |
Decision rule
Georgia-specific distinction
Worked example
Scenario. A 5/1 ARM has a five-year introductory rate and then adjusts annually based on an index plus a fixed margin, within caps.
Reason it through. The first number describes the initial fixed period and the second the later adjustment interval.
Answer. The rate is fixed for five years and can adjust once each year afterward under the formula and caps.
Common exam traps
- Adding the index and margin during the teaser period without reading terms
- Treating margin as the moving component
- Confusing rate caps with payment certainty
- Reading 5/1 as five adjustments per year
Original practice questions with detailed explanations
These are original instructional questions mapped to the July 1, 2026 PSI outline. They are not copied from PSI or any live examination. Choose an answer before opening the explanation.
Question 1A borrower takes out a 7/1 ARM. How does the interest rate behave?
- A. It adjusts seven times during the first year
- B. It is fixed for one year, then adjusts every seven years
- C. It adjusts every seven months for the life of the loan
- D. It is fixed for seven years, then can adjust once a year
Show answer and explanation →
Answer: D. It is fixed for seven years, then can adjust once a year
In an ARM label like 7/1, the first number is the initial fixed period in years and the second is how often the rate adjusts afterward. So the rate holds for seven years and can then change annually under the index, margin and caps. Reading the first number as a count of adjustments per year is the usual misreading.
Question 2An ARM adjusts to the index plus a 2.75% margin. At the adjustment date the index is 4.10%, the current rate is 5.50%, and the periodic cap is 2%. No other cap applies. What is the new rate?
- A. 4.10%
- B. 6.85%
- C. 7.50%
- D. 8.25%
Show answer and explanation →
Answer: B. 6.85%
The new rate is the index plus the margin: 4.10% + 2.75% = 6.85%. The periodic cap allows up to 7.50% (5.50% + 2%), so 6.85% is within it. Choosing 7.50% treats the cap as the rate, and 8.25% wrongly adds the margin to the old rate instead of the index.
Question 3An ARM starts at 4% with a 2% periodic cap and a 5% lifetime cap over the start rate. Which statement is accurate?
- A. The rate can never exceed 6% over the loan's life
- B. The monthly payment can never increase
- C. The rate can never exceed 9% over the loan's life
- D. The rate can rise by up to 5% at each adjustment
Show answer and explanation →
Answer: C. The rate can never exceed 9% over the loan's life
The lifetime cap limits total movement above the start rate, so the ceiling is 4% + 5% = 9%, while the periodic cap limits each single adjustment to 2%. Caps limit rate movement but do not promise a steady payment. Reading the periodic cap as a lifetime ceiling produces the plausible 6% answer.
Ready to move on?
You have this distinction down when all of these are true.
- Define every compared term without using the other term as the definition.
- Rebuild the comparison table from memory.
- State the decision rule and Georgia distinction without notes.
- Solve the worked example after changing one key fact.
- Explain the rule or fact that makes each distractor wrong.
- Answer all three original questions correctly in mixed practice on a later day.
Recommended next lesson
Continue with Conventional Versus FHA Versus VA Versus USDA Loans. Now that you can read an ARM's index, margin and caps, the loan types guide covers who backs conventional, FHA, VA and USDA loans and how the exam tests the differences between them.
Return to the complete exam-concept library or the Financing hub.