Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

MLO Licensing 1064 > ARMs > Flashcards

ARMs Flashcards

1
Q

What is an ARM?

A

Adjustable-Rate Mortgage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

ARM Program 5/1. How long is the rate fixed for and then how often does it adjust?

A

5 years - rate fixed.

Adjust every 1 y ear after.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

ARM Cap 2/5. What is the limit the interest rate can go up or down each adjustment? Which is the lifetime cap?

A

2% = limit rate goes up/down each adjustment.

5% is the lifetime cap.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the lifetime cap added to?

A

The starting rate. This equals the highest the rate can go over the life of the loan.

Ex. Starting rate is 4% and the lifetime cap is 5%. The highest the rate can go over the lift of the loan is 9%.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the ARM margin?

A

The number a lender ADDS to an index to determine the interest rate of an ARM.

It is also the floor, meaning the interest rate cannot go below the margin.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the most common index?

A

LIBOR - London Interbank Offered Rate. It changes throughout the day.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is a Fully-Indexed Rate?

A

Addition of the Index and the Margin.

The borrower is underwritten at the higher of the starting interest rate, or the Fully-Indexed Rate.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

An ARM frees lenders from being locked into a ____ interest rate for the entire life of the loan

A

Fixed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

In an ARM, interest rates may adjust, according to the terms in the ____, to reflect the current cost of money.

A

Note

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is another term for an Adjustable Rate Mortgage (ARM)?

A

Variable Rate Loan

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

The interest rate on the ARM only changes if the chosen _____ changes.

A

Index

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the 5 main components of ARMs?

A
  1. Index
  2. Margin
  3. Rate Adjustment Period
  4. Interest Rate Cap/Floor (if any)
  5. Conversion Options (if any)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is an Index?

A

An economic measurement that is used to make periodic interest adjustments for an adjustable-rate mortgage.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is a fully indexed rate?

A

Index + Margin = Fully Indexed Rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the 2 places you’ll see the index?

A
  1. Loan Estimate

2. Promissory Note

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

The index is NOT under control of the lender. What determines the index?

A

Market conditions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What are the 5 most common indices?

A
  1. CMT (Constant Maturity Treasury)
  2. COFI (Cost of Funds Index)
  3. LIBOR (London Inter Bank Offering Rates)
  4. CODI (Certificate of Deposit Index)
  5. Prime Rate (Bank Prime Loan Rate)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the margin also sometimes referred to as?

A

Spread

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Is the margin a fixed or variable number?

A

Fixed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What does the margin represent for the lender?

A

Operating costs and profit margins

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Does the margin have to be disclosed on the Loan Estimate?

A

Yes

22
Q

Example: What would the fully indexed rate be?

  1. 25% Index
  2. 00% Margin
A

4.25% + 2.00% = 6.25%

23
Q

What is an Introductory Rate on an ARM?

A

The interest rate on an ARM at closing.

It will be in effect for a period of time ranging from 1 month to 10 years depending on the loan product.

24
Q

What are 2 other terms can an Introductory Rate be called?

A
  1. Start Rate

2. Initial Rate

25
Q

What is a teaser rate?

A

When the introductory rate is lower than the fully indexed rate at the time of closing.

26
Q

What is the Rate Adjustment Period?

A

The length of time between interest rate changes on ARMs.

27
Q

What is an Interest Rate Cap?

A

A limitation on the amount that an interest rate may increase or decrease either at the adjustment date or over the lifetime of the loan.

28
Q

What can an Interest Rate Cap also be referred to as?

A

Adjustment Caps

29
Q

What is the purpose of Interest Rate Caps?

A

Used with ARMs to limit the number of percentage points and interest rate can be increased during the term of a loan to help eliminate large fluctuations in mortgage payments (avoiding payment shock)

30
Q

What is payment shock?

A

A significant increase in the monthly payment on an ARM that may surprise (shock) the borrower.

31
Q

What are the 3 main interest caps on ARMs?

A
  1. Initial Cap
  2. Periodic Adjustment Cap
  3. Lifetime Cap
32
Q

What is the Initial Cap on an ARM?

A

The initial cap applies only to the first rate adjustment period and indicates the number of percentage points that a rate may increase over the start rate.

33
Q

What are Periodic Caps on ARMs?

A

Limits the amount the interest rate can adjust up or down from one adjustment period to the next.

34
Q

Periodic Cap Example:

If a previous period rate was 5% and the periodic cap is 2% what is the highest and lowest the rate could be?

A

3% lowest

7% highest

35
Q

What is the Life Cap on an ARM?

A

Sets a maximum number of percentage points that the rate can increase over the start rate for the life of the loan, functioning as a Rate Ceiling.

36
Q

Life Cap Example:

An ARM has an interest rate of 5.5% with a 6% lifetime cap. What is the highest interest rate the ARM could have?

A

11.5% (5.5% + 6% = 11.5%)

37
Q

Life Cap Example:

An ARM has a start rate of 3% and the life cap is 6%, what is the maximum rate the ARM can reach over the life of the loan?

A

9% (3% + 6% = 9%)

38
Q

Some ARMS allow for a higher rate change at the first adjustment and then apply a periodic adjustment cap to future adjustments.

These ARMs are usually identified with ___ numbers?

A

3 numbers

Ex: 5/2/6

39
Q

ARM adjustment example:

5/2/6

What does each number represent?

A

5% at the first adjustment. The first number is the interest rate cap for the first adjustment

2% for subsequent adjustable periods. The second number is the period adjustment cap

6% total over the life of the loan. The third number is the lifetime interest rate cap

40
Q

Rate caps are more commonly shown as 2 numbers. For example, 2/6, what does each number represent?

A

2 - the first number indicates the maximum amount the interest rate can increase (or potentially decrease) from one adjustment period to the next

6 - the second number indicates the maximum amount the interest rate can increase during the life of the loan

41
Q

ARM Example: an ARM has a start rate of 4% with a 2/6 cap.

What is the highest rate this ARM can ever be?

A

10% (4% + 6% = 10%)

42
Q

What is a Rate Floor and who does it protect?

A

The rate floor is the lowest interest rate to which an ARM may adjust

A rate floor is sometimes included in a lending agreement in order to protect the lender.

43
Q

What are the 4 types of ARMs a lender may offer?

A
  1. Interest Only
  2. Payment Option
  3. Convertible
  4. Hybrid
44
Q

What is an Interest-Only ARM?

A

Allows payment of interest only for a specified number of years (typically between 3-10 years)

  • Allows the borrower to have smaller monthly payments for a period of time
  • After that, monthly payments increase even if interest rates stay the same, because the borrower must start repaying the principal and interest each month
45
Q

What is an Option ARM and what are the types of options offered?

A

A type of ARM that allows the borrower to choose among several payment options each month.

  • This provides flexibility for borrowers by allowing them to choose the payment that suits their current financial situation.
  • Option ARMs offer a variety of payment options, such as a minimum payment (which can lead to negative amortization), a 15 year or 30 year amortized payment, or an interest-only payment
46
Q

What is recasting?

A

Option ARM payments are typically adjusted every 5 years. The automatic payment adjustment is called recasting.

  • It amortizes the loan so it can be paid in full by the end of the loan term
  • Lenders do this by amortizing the higher principal balance created by the addition of interest (negative amortization)
47
Q

What makes an ARM a convertible ARM?

A

If the ARM has a conversion option. This allows a borrower to convert from an ARM to a fixed without going through the refinance process.

  • The lender may charge a one-time fee to convert
  • When the loan converts, it converts to the current prevailing rate
48
Q

What is a Hybrid ARM?

A

Combines the features of a fixed-rate loan with those of an adjustable-rate loan.

  • Desirable for borrowers who plan to sell their homes or pay off the loan within a few years
  • Fixed-rate feature gives the borrower some security with fixed rates in the initial term
  • Adjustable-rate feature is that the initial interest rate on these loans are typically lower than a fixed-rate loan
  • Initially, a fixed interest rate exists for a period of 3, 5, 7 or 10 years.
49
Q

Hybrid ARMs are often advertised as 3/1, 5/1, 7/1 or 10/1 ARMs. What does the first and second number tell a borrower?

A

The first number tells how long the fixed interest rate period will be

The second number tells how often the rate will adjust after the initial period.

50
Q

Hybrid ARM Example: 5/1

What does each number represent?

A

5 = 5 years at the initial fixed rate

1 = after the 5 years, the rate may adjust annually (1 year) until the loan is paid off

51
Q

Hybrid ARM Example: 2/28

What does each number represent?

A

The first number (2 years) is how long the fixed interest-rate period will be

The second number (28 years) is the number of years the rates on the loan will be adjustable

MLO Licensing 1064 (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions