Chapter 1
Federal Mortgage Laws and Consumer Protection Regulations
Course: Safe Mlo Prep
Subject: Safe Mlo Prep
Chapter: General Mortgage Knowledge
OVERVIEW
Adjustable-rate mortgages begin with a fixed introductory interest rate period and then adjust periodically based on a market index. They introduce payment variability for the borrower but typically offer lower initial rates than fixed-rate mortgages.
- How ARMs Work
- Initial fixed period: The interest rate and payment are fixed for an introductory period — typically 3, 5, 7, or 10 years
- Adjustment period: After the initial period, the rate adjusts at regular intervals — typically annually
- Rate calculation: New rate = index + margin
- The payment changes with each rate adjustment
- ARM Naming Convention
ARM names describe the initial fixed period and the adjustment frequency:
- 5/1 ARM: Fixed for 5 years — adjusts every 1 year after that
- 7/1 ARM: Fixed for 7 years — adjusts every 1 year after that
- 10/1 ARM: Fixed for 10 years — adjusts every 1 year after that
- 3/1 ARM: Fixed for 3 years — adjusts every 1 year after that