General Mortgage Knowledge · 20% of the SAFE examhard
Correct answer: The fully indexed rate or the maximum rate during the first five years, whichever is higher
Under 12 CFR §1026.43(c)(5), for ARMs with an initial fixed period of five years or more, lenders must underwrite using the greater of: (1) the fully indexed rate (index + margin at origination), or (2) the introductory rate plus any annual cap applied over the fixed period. For a 5/1 ARM with a 2/2/5 cap structure: the first adjustment cap is 2%, so at first reset the rate could be 6.5% (4.5% + 2%). The lender uses the higher of the fully indexed rate or this first-adjustment rate. The initial rate of 4.5% is not used for ATR underwriting on ARMs. The lifetime cap of 9.5% (4.5% + 5%) is the maximum possible, but ATR does not require underwriting to the lifetime maximum for 5-year ARMs — that standard applies to shorter initial periods.
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