An adjustable-rate mortgage that has a fixed rate for 5 years and can change annually is known as a _______ ARM, with the rate rounded to the nearest ______.

An adjustable-rate mortgage (ARM) is labeled based on its adjustment periods. In this case, the designation of "5/1" indicates that the mortgage has a fixed interest rate for the first five years, after which the rate can adjust annually (the "1" following the slash). This structure allows borrowers to benefit from the predictability of fixed payments during the initial term while also being exposed to potential interest rate changes thereafter.

The rounding of the interest rate to the nearest "1/8th" is significant as it reflects common practice in mortgage lending where rates are often quoted in increments, allowing for more precise adjustments in monthly payments for borrowers once the fixed period concludes.

Understanding the terminology and structure of ARMs is essential in evaluating different mortgage options, as each offers varying levels of risk and potential benefit depending on market conditions and individual financial goals. The knowledge of these specifics helps mortgage professionals effectively guide clients through complex mortgage decisions.