Adjustable Rate Mortgages (ARMs) and Related Terminology Quiz
Test your knowledge of adjustable-rate mortgages with this quiz! Learn about ARMs, indexes, caps, margins, and more in mortgage finance.
#1
What does ARM stand for in the context of mortgages?
Automatic Rate Modification
Adjustable Rate Mortgage
Annual Repayment Model
Accumulated Real Estate Management
#2
Which of the following is a characteristic of an adjustable-rate mortgage?
Fixed interest rate throughout the loan term
Variable interest rate that can change periodically
No interest charged on the loan
Loan amount increases over time
#3
What is the index in an adjustable-rate mortgage used for?
Determining the loan amount
Setting the interest rate
Calculating the down payment
Evaluating the borrower's credit score
#4
What is a 'cap' in the context of adjustable-rate mortgages?
A type of mortgage insurance
The initial interest rate
A limit on how much the interest rate can increase
The down payment amount
#5
What is the initial fixed period called in an Adjustable Rate Mortgage (ARM)?
Steady Phase
Fixed Phase
Locked Period
Introductory Term
#6
Which of the following is a potential risk associated with adjustable-rate mortgages?
Consistent monthly payments
Interest rate increases leading to higher payments
Locked interest rates for the entire loan term
Predictable long-term costs
#7
What is the primary advantage of an adjustable-rate mortgage compared to a fixed-rate mortgage?
Stable monthly payments
Lower initial interest rates
Fixed interest rate for the entire loan term
Predictable long-term costs
#8
In an ARM, what is the 'margin'?
The interest rate index
The lender's profit margin
The borrower's credit score
The loan amount
#9
What is a 'payment cap' in the context of adjustable-rate mortgages?
The maximum loan amount
A limit on how much the monthly payment can increase
A type of mortgage insurance
The down payment amount
#10
How does a negative amortization occur in an ARM?
The interest rate decreases over time
The loan balance increases due to insufficient payments
The borrower pays off the loan faster than expected
The loan amount decreases
#11
What role does the 'teaser rate' play in adjustable-rate mortgages?
The interest rate set for the entire loan term
The initial lower interest rate to attract borrowers
A cap on interest rate increases
A fixed rate after the initial period
#12
What is the purpose of the 'lifetime cap' in adjustable-rate mortgages?
Setting the initial interest rate
Limiting the total interest rate increase over the loan term
Determining the loan amount
Calculating the down payment
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