#1
What is the primary characteristic of an adjustable-rate mortgage (ARM)?
Variable interest rate that changes periodically
ExplanationInterest rate changes over time.
#2
What happens to the monthly mortgage payments when the interest rate increases in an adjustable-rate mortgage (ARM)?
Payments increase
ExplanationPayments increase with rate rise.
#3
What is the primary advantage of an adjustable-rate mortgage (ARM) for borrowers who plan to move within a few years?
Low initial interest rate
ExplanationLow initial rate benefits movers.
#4
What is a 'margin' in the context of an adjustable-rate mortgage (ARM)?
The difference between the interest rate of the ARM and the index it's tied to
ExplanationDifference between ARM rate and index.
#5
What does the term 'index' refer to in the context of adjustable-rate mortgages (ARMs)?
A measure of changes in the economy used to adjust the interest rate on an ARM
ExplanationEconomic measure for rate adjustment.
#6
Which index is commonly used as a benchmark to determine the interest rate adjustments for an ARM?
London Interbank Offered Rate (LIBOR)
ExplanationLIBOR is the benchmark index.
#7
What does the 'initial cap' refer to in an adjustable-rate mortgage?
Maximum interest rate increase allowed at the first adjustment period
ExplanationMaximum increase at first adjustment.
#8
What is the main advantage of an adjustable-rate mortgage compared to a fixed-rate mortgage?
Lower initial interest rate
ExplanationLower initial rate.
#9
Which of the following statements about interest rate caps in adjustable-rate mortgages (ARMs) is correct?
Interest rate caps protect the borrower from drastic increases in the interest rate
ExplanationCaps protect from drastic rate increases.
#10
What is a 'payment shock' in the context of adjustable-rate mortgages (ARMs)?
A sudden increase in the mortgage payment due to a change in the interest rate
ExplanationSudden payment increase.
#11
In the context of adjustable-rate mortgages, what does the term 'margin' refer to?
The fixed component added to the index rate to determine the ARM interest rate
ExplanationFixed component added to index.
#12
What is negative amortization in the context of adjustable-rate mortgages (ARMs)?
A situation where the loan balance increases over time due to unpaid interest being added to the principal
ExplanationLoan balance increases over time.
#13
Which of the following factors can influence the frequency of interest rate adjustments in an adjustable-rate mortgage (ARM)?
The type of index used
ExplanationIndex type affects rate adjustments.
#14
What is a 'convertible ARM' in the context of adjustable-rate mortgages (ARMs)?
An ARM that allows the borrower to convert to a fixed-rate mortgage at specified times
ExplanationARM convertible to fixed rate.
#15
What is the 'lifetime cap' in an adjustable-rate mortgage (ARM)?
The maximum interest rate allowed over the loan term
ExplanationMaximum rate allowed over term.