A borrower expects to sell in about 4 years. A 30-year fixed is quoted at 6.75% and a 5/1 ARM at 5.5% with caps of 2/2/5.
Correct Answer
A) The ARM: her 4 years fall inside the 5-year period before any change
A 5/1 ARM holds its start rate for 5 years, and a borrower who expects to be gone in 4 pays the lower rate throughout and never meets an adjustment. Other choices: an ARM is not unsuitable as a class, and the fixed period is what makes it fit here; the lifetime cap matters if she stays, which is the risk rather than the reason; and paying 1.25 points more for certainty she does not need is the cost of the fixed, not an argument for it. Source: Product fit; the figures are the quotes in the stem
Why This Is the Correct Answer
A 5/1 ARM holds its start rate for 5 years, and a borrower who expects to be gone in 4 pays the lower rate throughout and never meets an adjustment. Other choices: an ARM is not unsuitable as a class, and the fixed period is what makes it fit here; the lifetime cap matters if she stays, which is the risk rather than the reason; and paying 1.25 points more for certainty she does not need is the cost of the fixed, not an argument for it. Source: Product fit; the figures are the quotes in the stem
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