FinanceIntermediateColorado Exam

The 'index' in an adjustable-rate mortgage (ARM) is:

AThe lender's profit margin

BAn external interest rate benchmark (such as SOFR or Treasury yields) to which the ARM rate is tiedCorrect

CThe initial interest rate offered to the borrower, though outcomes can differ depending on circumstances

DThe borrower's credit score index

Why An external interest rate benchmark (such as SOFR or Treasury yields) to which the ARM rate is tied Is Correct

Answer B: An external interest rate benchmark (such as SOFR or Treasury yields) to which the ARM rate is tied

The index is the external benchmark (SOFR, 1-year Treasury, LIBOR successor, CMT, etc.) used to calculate the ARM's interest rate at each adjustment period.

Exam Tip: Finance

Finance questions often involve calculations. Master the T-bar method, understand the difference between conventional and government-backed loans, and know key ratios like LTV and DTI.

Key Finance Terms in This Question

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.

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Key Terms to Know

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.

Discount Points

Prepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.

Deed of Trust

A security instrument used in many states instead of a mortgage, involving three parties: borrower (trustor), lender (beneficiary), and a neutral trustee.

Debt-to-Income Ratio (DTI)

A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.