Which of the following statements is FALSE regarding interest-only ARMs?

Selecting the statement regarding interest-only adjustable-rate mortgages (ARMs) that is false requires a deep understanding of how these loans function.

Interest-only ARMs allow borrowers to pay only the interest for a certain period, after which they begin paying principal alongside interest. Statement C asserts that these loans typically experience negative amortization with or without a payment cap. While it is true that some interest-only ARMs may lead to negative amortization, particularly if the borrower’s minimum payment does not cover the interest due, it is not a characteristic that universally applies to all interest-only ARMs. Many interest-only ARMs have structured payment caps that can prevent substantial increases in payment amounts, thus potentially avoiding negative amortization. Therefore, stating that they "typically" experience negative amortization is inaccurate as it depends on the specific terms of the loan.

In contrast, the other statements accurately describe characteristics of interest-only ARMs. These loans can indeed feature an adjustable interest rate throughout the entire term; they might have an initial fixed interest rate period before adjusting; and they include both an index and a margin to determine interest rate changes. Each of these characteristics is fundamental to understanding how interest-only ARMs function.