On January 1st, a borrower takes out a 5/1 ARM for 20 years bearing an initial APR
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Question:
On January 1st, a borrower takes out a 5/1 ARM for 20 years bearing an initial APR of 5.5%. Thereafter, during the loan’s adjustable period, interest will be 2.5% over CPI, adjusting annually.
(a) How does this 5/1 ARM protect the lender from risk?
(b) If the CPI on January 1st is 6%, what is the interest rate during the loan’s first year?
(c) If the borrower was also offered a 10/1 ARM (as an alternative to the 5/1 ARM), how would the margin of the 10/1 ARM likely differ from the margin of the 5/1 ARM?
Expert Answer:
Part a In the case of ARM interest rate after the initial period is adjusted according to the period... View the full answer
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