What happens to an ARM's interest rate if the index decreases below the margin amount?
Correct Answer
B) The rate equals the margin only
When the index falls below the margin, the interest rate equals the margin amount. For example, if the margin is 2.5% and the index falls to 1.0%, the rate would be 3.5% (1.0% + 2.5%), not negative.
Why This Is the Correct Answer
When the index falls below the margin, the interest rate equals the margin amount. For example, if the margin is 2.5% and the index falls to 1.0%, the rate would be 3.5% (1.0% + 2.5%), not negative.
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