Adjustable Rate Mortgage (ARM) Part 1 Flashcards
What does ARM/VRM stand for?
Adjustable Rate Mortgage/Variable Rate Mortgage, or Adjustable Rate Loan/Variable Rate Loan
The interest of an ARM varies upward or downwards over the term of the loan, on what conditions?
- ) Money market conditions.
2. ) Index chosen.
How can an ARM benefit a borrower, and the lender?
- ) An ARM may help a borrower qualify more easily for a home loan or more expensive home.
- ) For the lender, passes the risk of fluctuation interest rates on to the borrower; and frees the lender from being locked into a fixed-interest rate for the entire life of the loan.
With agreement of the lender, a borrower’s payments may stay the same for a specified time with an ARM—true or false?
True
What are the 5 components of an ARM?
- ) Index
- ) Margin
- ) Rate Adjustment Period
- ) Interest Rate Cap/Floor (if any)
- ) Conversion Options (if any)
What is an Index, who chooses the Index, and what is it referred to?
- ) An Index is an economic measurement that is used to make periodic interest adjustments for an adjustable-rate mortgage.
- ) The lender chooses the index that will be used.
- ) Cost of Money
What is a fully indexed rate?
It is the combination of the index and the margin.
What is the plural for index?
Indices, not Indexes.
What disclosure(s) does the index appear in?
The Loan Estimate and the Promissory Note
An index will fluctuate because of market forces, what does this do to a borrower’s actual interest rate?
It may cause it to increase or decrease.
What are the 5 most common Indices?
- ) The Constant Maturity Treasury (CMT)
- ) The 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)
The Margin, or known as Spread, represents what, and is used for what purpose?
- ) The Margin represents the lender’ operating costs and profit margin.
- ) Lenders add this number to an index to determine the interest rate of an ARM.
Like an Index, the margin will vary throughout the life of a loan—true or false?
False; the Margin is a fixed number that is not subject to change during the term of a loan.
-The Margin can vary greatly between different lenders.
Where is the Margin disclosed?
The Loan Estimate
How is the Fully Index Rate found?
By adding the index to the margin, lenders calculate the fully indexed rate.
EX: 4.25% Current Index Value + 2.00% Margin = 6.25% Fully Indexed Rate
For an ARM what is an Introductory Rate/Start Rate/Initial Rate?
The interest rate on an ARM at closing, and will be in effect for a period of time—depending upon the loan product.
What is it called when an introductory rate is lower than the fully indexed rate at the closing?
The Teaser Rate
What is the Rate Adjustment Period?
The Rate Adjustment Period is the length of time between interest rate changes on ARMs.
Within an ARM, what is an Interest Rate Cap/Adjustment Caps?
A limitation on the amount that an interest rate, that may increase or decrease either at the adjustment date or over the lifetime of the loan.
What is the purpose of the Interest Rate Cap?
Helps to eliminate large fluctuations in mortgage payments.
-This helps consumers avoid “payment shock.”
What is Payment Shock?
It is when there is a significant increase in the monthly payment on a ARM that may surprise the borrower.
What does CAPS do?
CAPS regulate how much the interest rate can increase in a given period.
What are three main interest caps?
- ) The initial Cap
- ) The Periodic Adjustment Caps
- ) Lifetime caps
What does the Initial Cap do?
It applies to the first rate adjustment period & indicates the number of percentage points that a rate may increase over the start rate.
