Question

When a qualified ARM has an initial fixed-rate term of more than five years, the lender must use what rate to qualify borrowers for the loan?

A) The initial fixed-rate.
B) The fully indexed rate.
C) The introductory rate.
D) The average of the adjustable rates.

Answer 1

Lenders must use the fully indexed rate to qualify borrowers for an ARM with an initial fixed-rate term of more than five years, ensuring borrowers can handle potential interest rate increases.

Step-by-step explanation:

When a qualified Adjustable Rate Mortgage (ARM) has an initial fixed-rate term of more than five years, lenders must use the fully indexed rate to qualify borrowers for the loan. This means that they consider the interest rate that reflects the actual cost of the loan based on the index it's tied to, rather than just the introductory rate. This practice ensures that the borrower is capable of handling the potential increase in interest rate after the introductory period.