Finance
In a Pennsylvania adjustable-rate mortgage (ARM), what is the 'index' and how does it affect the interest rate?
AThe index is a fixed margin set by the lender added to the borrower's credit score
BThe index is a benchmark interest rate (SOFR, Treasury) to which the lender's margin is added to determine the ARM rate✓ Correct
CThe index is the PA Realty Transfer Tax rate used to calculate closing costs
DThe index is the ratio of the loan amount to the appraised value
Explanation
An ARM's interest rate is calculated by adding the lender's fixed margin to a variable index rate (such as SOFR, one-year Treasury, or LIBOR's successor). When the index rises, the borrower's rate increases at the next adjustment; when the index falls, the rate decreases.
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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.
Closing CostsFees and expenses paid by the buyer and/or seller at the closing of a real estate transaction, in addition to the property's purchase price.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
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.
Math Concepts
State-Specific Concepts
Transfer Tax
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