Question

Which of the following is TRUE?

A. Tighter interest rate adjustment caps on an ARM means greater interest rate risk to lenders.

B. A Price Level Adjusted Mortgage does not involve negative amortization.

C. The longer the time between rate adjustments on an adjustable-rate mortgage the more risk assumed by borrowers.

D. A reverse mortgage is structured as rising equity, rising debt loan.

Answer 1

A is TRUE  since typically lenders start with low teaser rates and tigher caps may limit their ability to raise rates and hence greater interest rate risk to them.

B is FALSE since PLAM can lead to increase in outstanding loan balance and hence negative amortization

C is FALSE since risk may not be on borrowers and depends on whether interest rates have changed in which direction during that period.

D is FALSE since reverse mortgages are rising debt, falling equity loans. As your debt (the amount you owe) grows larger, your equity (that is, your home's value minus any debt against it) generally gets smaller