Finance
A Florida lender offering a 'teaser rate' on an ARM initially charges 2.5%, then adjusts to the index plus margin (e.g., 5%) at the first adjustment. The 'payment shock' refers to:
AThe initial low rate
BThe sudden increase in the monthly payment when the rate adjusts upward from the teaser rate✓ Correct
CThe lender's profit from the interest rate change
DThe prepayment penalty charged at the time of adjustment
Explanation
Payment shock occurs when an ARM's initially low teaser rate adjusts upward at the first reset, causing a sudden and significant increase in the borrower's monthly payment. This is a key consumer protection concern with ARM products.
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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.
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.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
Private Mortgage Insurance (PMI)Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.
Math Concepts
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