Finance
An adjustable-rate mortgage (ARM) in Michigan carries the risk that:
AThe interest rate is permanently fixed
BMonthly payments may increase if the index rate rises✓ Correct
CThe lender may call the loan due immediately
DThe borrower is locked in for 30 years regardless of rates
Explanation
An ARM's interest rate is tied to a financial index and can adjust periodically. If interest rates rise, monthly payments increase, which is the primary risk for borrowers with ARMs.
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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.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Math Concepts
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