Adjustable-rate mortgages (ARMs) Flashcards
This section will test your knowledge of ARMs and why you may offer these to a borrower who is after a certain type of loan. You will begin to see how mortgages can vary a lot not just by their name, but the inner workings of adjusted interest rates and other extras depending on the client.
What does an ARM offer?
A. Fixed interest rates.
B. Flexible interest rates.
C. An interest rate that varies.
D. An interest rate determined by the borrower.
Correct answer: C
C is correct, as an ARM offers a wide range of interest rates (often beginning with cheaper rates in the short term than adjustable ones after a set period). The rate that an applicant pays does ultimately down to the whim of the lender who decides the rate based on the FOMC and the credit
rating of the applicant. Of course, the interest rate can also change based on
the state of the market.
When it comes to interest rates, why would a borrower want an adjustable-rate mortgage?
A. Short-term loans.
B. Investment properties.
C. Pay less on settlement fees and save on monthly mortgage payments.
D. Borrowers cannot decide on exact interest rates.
E. All the above.
Correct answer: E
E is correct, as when it comes to interest rates a borrower may want an ARM because they can see the many benefits (short-term property loans and low fees). So, if a lender has a property investor applicant, they could recommend an ARM because they have low initial fees and then after a set
period increase. The applicant can sell before the fees increase and they will
save money than if they’d committed to a high interest rate upfront on a longer-term loan.
What is the initial fixed-rate period of an adjustable-rate mortgage?
A. The first five years.
B. The first seven years.
C. The first ten years.
D. It all depends on the lender or loan.
E. All the above.
Correct answer: E
E is correct because the lender, loan, and borrower’s personal situation dictate an ARM’s fixed-rate period. However, on average, a fixed interest rate will be in place for the first five, seven, or ten years of the loan, after which time the interest rate will increase or decrease based on the state of
the housing market.
What are the adjustable-rate mortgage interest rates based upon?
A. Market conditions.
B. FOMC recommendations.
C. The lenders.
D. The type of mortgage.
E. A & B.
Correct answer: E
E is correct because an ARM interest rate is based upon the market conditions and will rise or fall over a loan term. ARM interest rates can also be changed based on FOMC recommendations.
When is the interest rate adjusted in an adjustable-rate mortgage?
A. On a pre-set schedule.
B. Every six months after the fixed-rate period ends.
C. After FOMC’s yearly interest rate update.
D. The lender can change it when the loan is not paid back quickly enough.
Correct answer: AA is correct because when a borrower signs on to an ARM, they will agree to a pre-set schedule of interest rate changes after the initial fixed interest-rate period ends. The lender must stick to this agreed schedule, and they cannot just change it because the borrower is not paying the loan back quicker enough.
