FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities
A lender offers a 5/1 hybrid adjustable-rate mortgage. Which description of its interest rate is correct?
A 5/1 hybrid ARM carries a fixed rate for the first five years and then resets once a year, typically based on an index plus a margin, subject to any caps, for the rest of the loan term.
- AThe rate is fixed for the first five years and then resets annuallyCorrect
- BThe rate resets every five years after an initial one-year fixed period
- CThe rate is fixed for one year and then resets five times, after which it becomes fixed
- DThe rate is fixed for the first five years and then converts to a fixed rate for the remaining term
Explanation
In a 5/1 hybrid ARM the first number is the initial fixed-rate period in years and the second is the reset frequency afterwards. So the rate is fixed for 5 years and then adjusts every year. The reversed reading is the common error.
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