Which of the following is a consumer protection feature in an ARM?

Which of the following is a consumer protection feature in an ARM?

• A. Fixed payment schedule
• B. Periodic Rate Cap
• C. Flexible repayment terms
• D. Pre-payment penalties

Answer: (B)

A periodic rate cap is indeed a consumer protection feature in an adjustable-rate mortgage (ARM). This feature limits the amount by which the interest rate can increase at each adjustment period, as well as the maximum interest rate over the life of the loan. This is significant because it helps borrowers manage the financial risk associated with potential interest rate increases. With periodic rate caps, borrowers have a hedge against fluctuating market rates, ensuring that their adjustments do not exceed a predetermined maximum. This safeguard provides a level of predictability and stability in monthly payments, making it easier for consumers to budget and plan their finances over time. In contrast, a fixed payment schedule is a feature associated with fixed-rate mortgages rather than ARMs. Flexible repayment terms do not provide specific protections against rising interest rates, and pre-payment penalties can actually disadvantage consumers by imposing additional costs if they wish to pay off their loan early. Thus, while these elements may be relevant in the context of mortgages, only the periodic rate cap directly serves as a protective measure within the structure of an adjustable-rate mortgage.

A periodic rate cap is indeed a consumer protection feature in an adjustable-rate mortgage (ARM). This feature limits the amount by which the interest rate can increase at each adjustment period, as well as the maximum interest rate over the life of the loan. This is significant because it helps borrowers manage the financial risk associated with potential interest rate increases.

With periodic rate caps, borrowers have a hedge against fluctuating market rates, ensuring that their adjustments do not exceed a predetermined maximum. This safeguard provides a level of predictability and stability in monthly payments, making it easier for consumers to budget and plan their finances over time.

In contrast, a fixed payment schedule is a feature associated with fixed-rate mortgages rather than ARMs. Flexible repayment terms do not provide specific protections against rising interest rates, and pre-payment penalties can actually disadvantage consumers by imposing additional costs if they wish to pay off their loan early. Thus, while these elements may be relevant in the context of mortgages, only the periodic rate cap directly serves as a protective measure within the structure of an adjustable-rate mortgage.