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.
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A borrower's homeowners insurance policy is cancelled mid-term due to non-payment, but the escrow account shows the premium was paid. Investigation reveals the insurance company applied the payment to a different policy number. What should the servicer do?
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