ARMS Questions and Answers

ARMS Questions and Answers When an ARM has a 2/6 cap, this means the rate cannot increase more than 2% in any year or more than 6% over the term of the loan. Which of the following is NOT a commonly used index for ARMs? The Federal Reserve Board's Federal Funds Rate Which of the following is the slowest moving index among those commonly used for ARMs? COFI slowest. LIBOR is the quickest An ARM rate adjustment will take into account which of the following? Index rate, margin and cap The lowest payment option for an option ARM is minimum payment. Which of the following is NOT one of the commonly used payment options offered with the option ARM? Fixed index rate The interest rate for an ARM will change periodically based on changes in index A low introductory rate on an adjustable rate mortgage is called a(n) Teaser Rate An ARM has a current rate of 4.50%. It has a 1/5 cap and a margin of 2%. If the current T-bill rate of 3-1/8% is its index rate, what would the new ARM rate be when it is adjusted? The rate would be equal to the lower of the index rate plus margin or the current rate plus cap. (To add fractions and decimals, you can divide the top number by the bottom number in the fraction to get a decimal, or you can multiply the decimal by the bottom number of a fraction to get the top number.) For example, 1/8 = 1 ÷ 8 = .125; or .125 x 8 = 1 (.125 = 1/8) 3-1/8% (index rate) + 2% (margin) = 5-1/8% ARM rate 4.50% (current rate) + 1% (cap) = 5.50% The rate can be increased to 5-1/8 percent. A 1/5 cap indicates a change of no more than 1% at one time and no more than 5% over the term of the loan. The term "margin" is used frequently when describing terms for an adjustable rate loan. The "margin" is the amount the lender adds to a selected index rate. Which of the following best describes negative amortization? The result of principal and interest payments not covering all of the interest being charged. An interest-only ARM payment plan allows a borrower to pay only the interest for a specified number of years, typically between three and 10 years. All of the following are nontraditional loan products EXCEPT interest-only 30-year mortgage loans. An ARM had an initial rate of 3-5/8%. It has a 2/6 cap and a margin of 2.50%. If the current T-bill rate of 3-3/8% is its index rate, what would the new ARM rate be when it is adjusted? The rate would be equal to the lower of the index rate plus margin or the current rate plus cap. (To add fractions and decimals, you can divide the top number by the bottom number in the fraction to get a decimal, or you can multiply the decimal by the bottom number of a fraction to get the top number.) For example, 5/8 = 5 ÷ 8 = .625; or .625 x 8 = 5 (.625 = 5/8) 3-3/8% (index rate) + 2-4/8% (margin) = 5-7/8% ARM rate 3-5/8% (current rate) + 2% (cap) = 5-5/8% The rate cannot exceed 5-5/8 percent. A 2/6 cap indicates a change of no more than 2% at one time and no more than 6% over the term of the loan.