One characteristic of an Adjustable Rate Mortgage (ARM) is

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Question restatement: The prompt asks for a characteristic of an Adjustable Rate Mortgage (ARM).

Option 1: 'that the requirement for Private Mortgage Insurance is waived for many Borrowers.' In general, PMI requirements are tied to loan-to-value ratios, credit, and loan type, not the ARM feature itself. An ARM does not inherently waive PMI; this is not a defining characteristic of ARMs and can be false depending on loan-to-value and program rules. Therefore, this is inaccurate as a characteristic of ARMs.

Option 2: 'the adjustment to the interest rate is usually an interest rate like the yield on Moody's Seasoned Baa Corporate Bond Yield.' While some indices exist for rate adjustments (like SOFR, LIBOR in the past), stating it is usually a Moody's Baa yield is incorrect. ARM adjustments typically reference widely used benchmark indices (e.g., SOFR or LIBOR) plus a margin, not the Moody's Baa corporate bond yield. This misstates how ARMs determine new rates, so this option is incorrect.

Option 3: 'it places more risk with the Borrower, shifting it from the Lender.' This aligns with the core feature of ARMs: as interest rates can change over time, the borrower bears the risk of higher payments if rates rise. The lender’s risk is reduced relative to a fixed-rate loan, while the borrower assumes more exposure to payment variability. This is a true characteristic of ARMs.

Option 4: 'that ARMs with caps have lower initial interest rates than ARMs that do not have them.' While caps can influence future adjustments, saying that caps inherently produce lower initial rates is not a defining characteristic. Initial rates are determined by the loan terms, and both capped and uncapped ARMs can have low or high teaser rates depending on the product; caps mainly affect how much rates can adjust later, not necessarily the initial rate being lower. Thus, this statement is not universally true and is misleading as a characteristic.

Summary of why options are right or wrong: Option 1 misstates PMI treatment with ARMs. Option 2 misidentifies the standard benchmark index for rate adjustments. Option 3 correctly captures a fundamental aspect of ARMs—the borrower's exposure to rate-driven payment variability. Option 4 overgeneralizes the effect of caps on initial rates and is not a reliable characteristic of ARMs.

BUSFIN 4265 SP2025 (5285) Final Exam Brandl 2e Chapters 18-19-20-21-24

One characteristic of an Adjustable Rate Mortgage (ARM) is

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