Adjustable Rate Mortgage (ARM) Part 2

Question 1

Most commonly, ARMs are shown with only two numbers, what are they—for example, 2/6?

Answer 1

2% would indicate that the interest rate can increase or decrease for a maximum of 2%

6% indicates that the interest rate can raise a maximum of 6% during the life of the loan.

Question 2

What is the Rate Floor?

Answer 2

It is the lowest interest rate to which an ARM may adjust.

Question 3

The Rate Floor usually only protects the borrower—true or false?

Answer 3

False, it protects the lender as well; by establishing the lowest interest rate to which an ARM may adjust, to keep it from going to low.

Question 4

There are generally four types of loans, what are they?

Answer 4

1. ) Interest-only ARMs
2. ) Payment-option ARMs
3. ) Convertible ARMs
4. ) Hybrid ARMs

Question 5

What does an Interest-only (IO) ARM do, and what is its purpose?

Answer 5

1. ) What it does: It allows interest only payments for a specified number of years (Usually between 3 and 10 yrs).
2. ) Purpose: Allows the borrower to have smaller monthly payments for a period of time.

Question 6

What is an Option ARM and for what purpose would a borrower go with this type of loan?

Answer 6

1. ) An Option ARM is a loan that allows the borrower to choose among several payment options each month.
2. ) This provides flexibility for borrowers by allowing them to choose the payment that suits their current financial situation.

Question 7

What are the variety of payment options that Option ARMs have to offer?

Answer 7

1. ) Minimum Payment
2. ) 15-year or 30-year amortized payment
3. ) Interest-only payment

Question 8

In association with Option ARMs, what is Recasting?

Answer 8

Recasting is the automatic adjustment of Option ARM payments, typically done every 5 years.

Question 9

For Option ARMs, why is Recasting done?

Answer 9

The Loan is amortized so it can be paid in full by the end of the loan term.

Question 10

An ARM that has a conversion option, is called what?

Answer 10

A Convertible ARM

Question 11

A Convertible ARM bypasses what transactional process to be a fixed-rate mortgage?

Answer 11

Refinancing (To change form an ARM to a fixed-rate mortgage, a refinance of the transaction is generally required.)

Question 12

If an ARM is converted to a fixed-rate—through a Convertible ARM—the lender is allowed to charge multiple charges within the process, true or false?

Answer 12

False, the lender may charge a one-time fee at the time the loan is converted to a fixed-rate.

Question 13

With a Convertible ARM, when the loan converts to a fixed-rate, what is the rate?

Answer 13

The current prevailing rate.

Question 14

Describe a Hybrid ARM

Answer 14

A Hybrid ARM combines the features of a fixed-rate loan with those of an adjustable-rate loan.

Question 15

How are Hybrid ARMs often advertised?

Answer 15

3/1, 5/1, 7/1, 10/1

Question 16

What does the first and second number mean with the advertising of a Hybrid ARM? Example: 5/1

Answer 16

1. ) The first number tells how long the fixed IR period will be; the second tells how often the rate will adjust after the initial period.
2. ) 5 years for the fixed rate, and afterwards adjust every year.