ARM

Question 1

What is an Adjustable-Rate Mortgage?

Answer 1

A mortgage when the interest rate stays the same, typically for the first year or a few years, and then it begins to adjust periodically. Once the rate begins to adjust, the changes to the interest rate are based on the market.

Question 2

What is a Hybrid Mortgage?

Answer 2

Combination of fixed rate and adjustable-rate mortgage. It begins with a fixed interest rate for a set period and then the rate will adjust according to loan terms.

Question 3

What is a Convertible ARM?

Answer 3

An adjustable-rate mortgage (ARM) that gives the borrower the option to convert to a fixed-rate mortgage after a specified period of time (Conversion Clause).

Question 4

What is an Option ARM?

Answer 4

Type of adjustable-rate mortgage where the borrower has several options, option ARMs have alternative payment options where the borrower can make significantly smaller payments by making interest-only payments or minimum payments.

Question 5

What is the benchmark rate that’s connected to an adjustable rate mortgage called?

Answer 5

Index It is a variable rate that can increase or decrease over time, following the movements of current market conditions.

Question 6

What are the 5 common indices?

Answer 6

● Cost of funds index (COFI)
● Cost of Savings Index (COSI)
● Secured Overnight Financing Rate (SOFR)
● The U.S. Treasury
● The prime rate

Question 7

What is the Margin when it comes to Adjustable Rate Mortgages?

Answer 7

The number of percentage points (usually 2% or 3%) added to the index by the mortgage lender to set the interest rate on an Adjustable-Rate Mortgage (ARM) after the initial rate period ends. Reflects the lender’s profit and overhead.

Question 8

How do you get a fully indexed rate?

Answer 8

Index + Margin = Fully Indexed Rate.

Question 9

What are the 3 types of Rate Caps on an Adjustable Rate Mortgage?

Answer 9

● The initial adjustment cap limits how much the rate can increase when the rate first adjusts ● The periodic adjustment cap (Subsequent) limits how much the rate can increase from one adjustment period to the next ● The lifetime adjustment cap limits how much the rate can increase or decrease over the life of the loan

Question 10

What is the introductory rate charged on adjustable rate mortgages that entices borrowers by charging a low initial rate called?

Answer 10

Teaser Rate

Question 11

What is the lowest interest rate that the ARM may adjust called?

Answer 11

Floor Rate

Question 12

What occurs when suddenly the rate or payment increases to a large amount that is to be paid all at once?

Answer 12

Payment Shock