Finance
A Pennsylvania ARM (adjustable-rate mortgage) with a 5/1 structure means:
A5% rate for 1 year, then adjustable
BFixed rate for 5 years, then adjusts annually✓ Correct
CAdjusts 5 times in the first year, then fixed
D5-year balloon with 1 payment per year
Explanation
A 5/1 ARM has a fixed interest rate for the first 5 years, then adjusts annually based on an index (typically SOFR or a Treasury index) plus a margin. ARMs offer lower initial rates than fixed loans, making them attractive for buyers who plan to sell or refinance within the initial fixed 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.
Option ContractA contract giving the buyer the right, but not the obligation, to purchase a property at a specified price within a specified time period.
Math Concepts
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