A borrower has a 5/1 ARM with an initial rate of 3.5%. The loan uses the 1-year Treasury index, which is currently at 2.0%, and has a margin of 2.75%. What will the borrower's new interest rate be at the first adjustment, assuming no rate caps apply?
Correct Answer
B) 4.75%
At adjustment, the new rate equals the index (2.0%) plus the margin (2.75%) = 4.75%. The initial rate of 3.5% was a teaser rate below the fully indexed rate.
Why This Is the Correct Answer
At adjustment, the new rate equals the index (2.0%) plus the margin (2.75%) = 4.75%. The initial rate of 3.5% was a teaser rate below the fully indexed rate.
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