Adjustable-rate mortgage (ARM) Flashcards
(10 cards)
What is an adjustable-rate mortgage (ARM)?
a loan that has an interest rate that can change at preset intervals, based on a predetermined index
ARMs typically start with a lower interest rate than fixed-rate mortgages.
Does an ARM loan have a due-on-sale clause (assumable)?
no
This means the loan cannot be assumed by a new buyer if the property is sold.
What is the index in an adjustable-rate mortgage?
the index is an economic indicator used to adjust the interest rate
Common indices include the LIBOR, the Treasury index, and the Cost of Funds Index. (you don’t have to memorize that but just FYI)
In an ARM, the margin represents the _______ plus ____
lender’s cost of doing business plus profit
The margin is added to the index to determine the interest rate.
The calculated interest rate is the ____ plus _____
index + margin
This formula is crucial for understanding how the interest rate is determined in an ARM.
What is the adjustment interval for an ARM?
how often the interest rate adjusts
This can vary from annually to every few months, depending on the specific loan terms.
The interest rate ___ limits how much the interest rate may change per adjustment
interest rate cap (aka periodic cap)
This protects borrowers from significant increases in their interest rates.
Payment ___ limit the amount the monthly payment may increase during an adjustment
payment cap
This feature can help borrowers manage their monthly budgeting.
What is negative amortization?
When the mortgage payments are not large enough to cover interest expense
- (So, your monthly payment is not enough to cover all the interest, so you have unpaid interests that actually gets added back to the original loan amount)
- (and the loan amount actually goes up instead of down!)
What is a teaser rate?
A teaser rate is a below-market initial interest rate
It is often used to attract borrowers to choose a particular loan.
