Adjustable rate mortgage mechanics, index and margin, and interest-only and balloon loan products tested on the SAFE Act exam.
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- What is an adjustable rate mortgage (ARM)?
- A mortgage loan where the interest rate changes periodically, typically starting with an initial fixed rate followed by adjustments at specified intervals.
- What is the teaser rate in an ARM?
- The initial, below-market interest rate offered for the first period of an adjustable rate mortgage, designed to attract borrowers.
- How does an ARM differ from a fixed-rate mortgage?
- An ARM has an interest rate that adjusts periodically based on market conditions and a specified index, while a fixed-rate mortgage keeps the same rate for the entire loan term.
- When does the rate adjustment begin in a typical ARM?
- After the initial fixed-rate period ends, which is commonly 3, 5, 7, or 10 years, depending on the ARM structure.
- What is the initial rate period in an ARM?
- The period at the beginning of the loan during which the interest rate is fixed, before any rate adjustments occur.
- What is the index in an adjustable rate mortgage?
- A published interest rate (such as LIBOR, Prime Rate, or Treasury rate) that the lender uses as a reference point to calculate rate adjustments.
- What is the margin in an adjustable rate mortgage?
- A number of percentage points added by the lender to the index to calculate the new interest rate, fixed for the life of the loan.
- How is the new interest rate calculated on an ARM?
- Index plus margin equals the new interest rate (before any caps are applied).
- Who sets the margin in an adjustable rate mortgage?
- The lender sets the margin at origination, and it remains fixed for the life of the loan.
- Name one common index used in ARM interest rate calculations.
- LIBOR, Prime Rate, Treasury index, or COFI (Cost of Funds Index).
- What happens to a borrower's ARM rate if the index decreases?
- The new rate decreases, assuming the calculation is index plus margin and no rate floor prevents it.
- Can the margin change during the life of an ARM?
- No, the margin is fixed at origination and does not change for the life of the loan.
- What is a periodic rate cap?
- A limit on how much the interest rate can increase at each scheduled rate adjustment date.
- What is a lifetime rate cap or ceiling?
- The maximum interest rate the loan can reach over the entire life of the mortgage.
- What is a rate floor in an ARM?
- The minimum interest rate below which the loan rate cannot fall, even if the index decreases.
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