ARMS Questions & Solutions
ARM
Adjustable Rate Mortgage
Adjustable Rate Mortgage (ARM)
An ARM frees lenders from being locked into a fixed-rate for the entire life of the loan.
In an ARM, interest rates may adjust, according to the terms in the promissory note, to reflect the current c...
ARMS Questions & Solutions
ARM - answer Adjustable Rate Mortgage
Adjustable Rate Mortgage (ARM) - answer An ARM frees lenders from being locked
into a fixed-rate for the entire life of the loan.
In an ARM, interest rates may adjust, according to the terms in the promissory note, to
reflect the current cost of money.
ARMs are popular tools because they may help borrowers qualify more easily for a
home loan or for a more expensive home
T/F Many lenders like ARMS because they can pass the risk of fluctuation interest rates
on to borrowers - answer T
An ARM is also referred to as a - answer Variable Rate Loan
The interest an ARM loan varies upward or downward over the term of the loan
depending on money market conditions and the agreed upon ________ - answer
index
The interest rate on the ARM only changes if the chosen _______ changes - answer
index
T/F The interest rate on the ARM only changes if the chosen index changes - answer
T
There are several components of an ARM - answer - Index
- Margin
- Rate adjustment period
- Interest rate cap/floor (if any)
- conversion options (option to convert from adjustable to fix at some point)
Index - answer an economic measurement used to make periodic interest
adjustments for an ARM
Who choses which index will be tied to the loan? - answer lender
The index is often referred to as the ______ __ _________ - answer cost of money
T/F The lender can control the measurement the index is at any given time. - answer
F
, T/F The lender chooses the index but does not control the measurement of the index -
answer T
What causes the index to fluctuate ? - answer market forces
Fully Indexed Rate - answer The combination of the index and the margin
The combination of the index and the margin in known as the - answer Fully Indexed
Rate
The plural for index - answer indices
The specific index used to determine the rate adjustments must be disclosed to a
potential borrower on the ________ - answer loan estimate
The specific index used to determine rate adjustments is located on the __________
_____ when the loan does to closing - answer Promissory Note
T/F The index used to determine rate adjustments can be found on the loan estimate
and the promissory note - answer T
The index is/is not under the control of the lender - answer is not
The most common indices are: - answer - CMT - Constant Maturity Treasury
- 11th District Cost of Fund Index (COFI)
- The London Inter Bank Offering Rates (LIBOR)
- Certificate of Deposit Index (CODI)
- The Bank Prime Loan Rate (Prime Rate)
Margin - answer the number that the lender ADDs to the index to determine the
interest rate of an ARM
The margin is sometimes referred to as the _______ - answer spread
Index + Margin = - answer Adjustable Interest Rate OR
Fully Indexed Rate
T/F The margin remains the same across all lenders? - answer F
T/F The margin may not be the same across all lenders? - answer T
T/F The margin represents the lender's operating costs and profit - answer T
T/F The index represents the lender's operating costs and profit - answer F
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