Question

Emma is obtaining an adjustable rate mortgage that provided a rate cap of 8%. The index that the rate would be based upon is currently at 2 3/4%. Although Emma should have been paying a rate of 5%, she is being offered a teaser rate that is equal to 1% more than the margin. What is the teaser rate that Emma would enjoy?

A. 4%
B. 3.75%
C. 2.25%
D. 3.25%

Answer 1

The teaser rate for Emma's adjustable-rate mortgage, which is 1% more than the margin of 2.25%, is 3.25%.

Step-by-step explanation:

The student is asking about the teaser rate on an adjustable-rate mortgage (ARM). To find the teaser rate, we need to determine the margin which is the difference between the anticipated interest rate Emma should be paying, in this case 5%, and the current index rate of 2 3/4%. The margin in this situation is 5% - 2.75% = 2.25%. Since Emma is offered a teaser rate that is 1% more than the margin, the teaser rate would be 2.25% + 1% = 3.25%.

Adjustable-rate mortgages are known to have rate caps and often provide lower initial rates known as teaser rates. These teaser rates may be very attractive to borrowers, especially when they are significantly lower than the typical rates offered. However, these rates are temporary and can adjust according to the terms of the mortgage, which may lead to higher payments in the future.