Question

You are considering a 5/1 ARM. What does the 5 represent?
A.The number of years between adjustments in the interest rate
B.The number of years that a fixed interest rate will be applied to the loan
C.The total number of years in the loan
D.The interest rate of the initial fixed-rate loan period

Answer 1

the 5 in 5/1 means that you apply a certain interest rate for the first five years...this interest rate will NOT change during the first five years.

the 1 in 5/1 means you increment that interest rate (a specific/fixed amount) each year until you reach the cap

Answer 2

example: say you have a 5/1 ARM at 5.25% annual interest rate and you have a 1/12 cap structure

this would mean that during the first five years the interest rate is locked in at 5.25%

after the 5 years, the interest rate will go up one percentage point (6.25% on year 6, 7.25% on year 7, etc) until you reach the cap of 12%

Answer 3

B!!!