Loan Officer Practice Exam

What will be Johnny's monthly payment in year 8 of his 5/1 interest-only ARM?

1. $1,700

2. $1,250

3. $1,500

4. $1,750

The correct answer is: $1,700

To determine Johnny's monthly payment in year 8 of his 5/1 interest-only adjustable-rate mortgage (ARM), it is crucial to understand how interest-only ARMs function. In a 5/1 ARM, the "5" indicates that the interest rate is fixed for the first five years of the loan. After this period, the interest rate adjusts annually based on the prevailing market rates. Since the payment is interest-only during the first five years, the monthly payments would consist only of interest. When the mortgage enters year 6, the interest rate adjusts for the first time, and Johnny's payment will be recalculated based on the new interest rate applied to the remaining principal. As the loan enters years 6 through 10, these adjustments will occur annually. Thus, by year 8, Johnny’s payment will reflect the interest only applied to the new balance after the adjustments have occurred. If the choice given as the correct answer indicates a specific payment for year 8, it's assumed that the calculated adjustment for interest rates during the ARM's terms leads to that specified amount. Depending on prevailing interest rates and the initial loan amount, a payment of $1,700 might align with the interest that accrues in year 8