Adjustable Rate Mortgages Concepts

This video explores the mechanics of adjustable rate mortgages (ARM) and compares them to fixed rate mortgages. It explains how ARM rates adjust based on interest rate indexes like Treasuries and LIBOR, and discusses the potential risks and benefits for borrowers and lenders. The video also covers interest rate risk, highlighting who bears the risk in different mortgage scenarios.

What is the primary difference between an Adjustable Rate Mortgage (ARM) and a Fixed Rate Mortgage?

• ARMs have a fixed interest rate throughout the loan term.

• Fixed Rate Mortgages adjust their interest rates based on market conditions.

• ARMs adjust their interest rates periodically based on an index.

• Fixed Rate Mortgages have variable interest rates.

In a Fixed Rate Mortgage, what happens to the interest rate over the life of the loan?

• It remains constant.

• It decreases every year.

• It increases every year.

• It fluctuates based on the market.

What is a common index used for adjusting rates in an ARM?

• Consumer Price Index (CPI)

• Short-term Treasuries

• NASDAQ Composite

• Dow Jones Industrial Average

How often can the interest rate in an ARM typically reset?

• Every month

• Every six months or every year

• Every five years

• Only at the end of the loan term

What is a potential disadvantage of an ARM if interest rates rise significantly?

• The monthly payment increases.

• The interest rate remains the same.

• The loan term is shortened.

• The monthly payment decreases.

What is the purpose of caps in an ARM?

• To guarantee a fixed monthly payment

• To ensure the interest rate remains constant

• To limit how much the interest rate can decrease

• To limit how much the interest rate can increase

Why might a borrower choose an ARM over a Fixed Rate Mortgage?

• To have a shorter loan term

• To potentially benefit from lower initial interest rates

• To avoid any interest rate changes

• To have a predictable monthly payment

Who bears the interest rate risk in an ARM?

• The real estate agent

• The lender

• The borrower

• The government

In a Fixed Rate Mortgage, who takes on the interest rate risk?

• The real estate agent

• The government

• The lender

• The borrower

What happens to a bank's profit if short-term interest rates rise and they have issued many Fixed Rate Mortgages?

• Their profit decreases

• Their profit remains unchanged

• Their profit doubles

• Their profit increases