An ARM uses the 1-year Treasury index, which is currently at 2.1%. The margin is 2.75%, but the loan has a floor rate of 5.5%. What rate will the borrower pay?
Correct Answer
D) 5.5%
The fully indexed rate would be 2.1% (index) + 2.75% (margin) = 4.85%. However, since the loan has a floor rate of 5.5%, and the calculated rate is below this floor, the borrower must pay the higher floor rate of 5.5%. Floor rates protect lenders from extremely low interest rate environments.
Why This Is the Correct Answer
The fully indexed rate would be 2.1% (index) + 2.75% (margin) = 4.85%. However, since the loan has a floor rate of 5.5%, and the calculated rate is below this floor, the borrower must pay the higher floor rate of 5.5%. Floor rates protect lenders from extremely low interest rate environments.
More Mortgage Knowledge Questions
A borrower is comparing two loan offers: Loan A has no points and 4.5% interest rate, Loan B has 2 points and 4.0% interest rate. The loan amount is $400,000. How much will the borrower pay upfront for the points on Loan B?
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A borrower is considering paying discount points to reduce their interest rate. Each point costs 1% of the loan amount and reduces the rate by 0.25%. On a $300,000 loan, how much would the borrower pay for 2 discount points?
A borrower asks about the difference between discount points and origination fees. What is the most accurate explanation?
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