Question

A borrower takes out a 7/1 ARM with 2/1/6 caps and a start rate of 3.5%. The margin is 4% and the loan is for $200,000 on a 30-year term. The index is based on the LIBOR.How many years is this loan fixed and at what rate?

A. 7 years
B. 10 years
C. 9 years
D. 2 years

Answer 1

The borrower has a 7/1 ARM with a start rate of 3.5% and a margin of 4%. The loan is fixed for the first 7 years at a rate of 7.5%. After that, the rate will adjust annually based on the LIBOR index.

Step-by-step explanation:

An adjustable-rate mortgage (ARM) is a type of loan in which the interest rate can vary over time. In this case, the borrower took out a 7/1 ARM, which means that the interest rate is fixed for the first 7 years of the loan, and after that, it can adjust annually. The caps on the loan are 2/1/6, which means that the interest rate can't increase or decrease by more than 2% on the first adjustment, 1% on subsequent adjustments, and 6% over the life of the loan.

The start rate of the loan is 3.5%, and the margin is 4%. To calculate the initial rate, you need to add the start rate and the margin: 3.5% + 4% = 7.5%. So, for the first 7 years, the loan will have a fixed rate of 7.5%.

After the initial fixed period, the interest rate will adjust annually based on the index, which in this case is the LIBOR. The new rate will be calculated by adding the index value to the margin. For example, if the index is 4% and the margin is 4%, the new rate would be 8%.