Which item is not a component of an ARM loan?

Which item is not a component of an ARM loan?

• A. Index
• B. Margin
• C. Interest rate cap structure
• D. Appraised value

Answer: (D)

An ARM’s rate changes based on two main pieces: the index, which is a published rate that moves with the market, and the margin, a fixed percentage added to that index to determine the current rate. There is also a rate cap structure that limits how much the rate can adjust at each step and over the life of the loan. The appraised value of the property, while important for underwriting to determine eligibility and how much you can borrow (loan-to-value), does not affect the ARM’s interest-rate adjustments or caps. So appraised value is not a component of how an ARM’s rate is determined.

An ARM’s rate changes based on two main pieces: the index, which is a published rate that moves with the market, and the margin, a fixed percentage added to that index to determine the current rate. There is also a rate cap structure that limits how much the rate can adjust at each step and over the life of the loan. The appraised value of the property, while important for underwriting to determine eligibility and how much you can borrow (loan-to-value), does not affect the ARM’s interest-rate adjustments or caps. So appraised value is not a component of how an ARM’s rate is determined.