Finance
A Mississippi lender offers an 'adjustable-rate mortgage' (ARM) with an initial fixed period of 5 years, then annual adjustments. This is commonly called a:
AInterest-only mortgage
B5/1 ARM✓ Correct
CBalloon mortgage
D30/5 hybrid
Explanation
A 5/1 ARM has a fixed interest rate for the first 5 years, then adjusts annually thereafter. The first number (5) represents the initial fixed period; the second number (1) represents the adjustment frequency in years after the initial 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 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.
Deed of TrustA security instrument used in many states instead of a mortgage, involving three parties: borrower (trustor), lender (beneficiary), and a neutral trustee.
Math Concepts
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