Adjustable rate mortgage mechanics, index and margin, and interest-only and balloon loan products tested on the SAFE Act exam.
36 cards · basic cards · AI-written, checked twice. Edit anything.
- What is an adjustable rate mortgage (ARM)?
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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?
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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?
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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?
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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?
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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?
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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?
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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?
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Index plus margin equals the new interest rate (before any caps are applied).- Who sets the margin in an adjustable rate mortgage?
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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.
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LIBOR, Prime Rate, Treasury index, or COFI (Cost of Funds Index).- What happens to a borrower's ARM rate if the index decreases?
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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?
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No, the margin is fixed at origination and does not change for the life of the loan.- What is a periodic rate cap?
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A limit on how much the interest rate can increase at each scheduled rate adjustment date.- What is a lifetime rate cap or ceiling?
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The maximum interest rate the loan can reach over the entire life of the mortgage.- What is a rate floor in an ARM?
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The minimum interest rate below which the loan rate cannot fall, even if the index decreases.
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