A 3/1 ARM has been outstanding for 4 years. The loan originally had a start rate of 4%, and the current fully indexed rate is 3.2%. The loan has 2/2/6 caps and a 3.5% floor. What rate should the borrower pay?
Correct Answer
B) 3.5%
Even though the fully indexed rate is 3.2%, which is below the original start rate, the loan has a floor rate of 3.5%. The borrower cannot pay less than the floor rate, regardless of how low the index and margin calculation results in. Floor rates establish the minimum interest rate for the loan.
Why This Is the Correct Answer
Even though the fully indexed rate is 3.2%, which is below the original start rate, the loan has a floor rate of 3.5%. The borrower cannot pay less than the floor rate, regardless of how low the index and margin calculation results in. Floor rates establish the minimum interest rate for the loan.
More Mortgage Knowledge Questions
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A borrower asks about the difference between discount points and origination fees. What is the most accurate explanation?
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