On which of the following adjustable-rate loans must the bank use an index beyond its control?
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A. B. C. D.C
The answer to this question is D. A loan to purchase a home to be used as rental property.
An adjustable-rate loan, also known as a variable-rate loan, is a loan in which the interest rate can change periodically based on an index specified in the loan agreement. The index is typically a benchmark rate that is beyond the control of the bank, such as the prime rate, the London Interbank Offered Rate (LIBOR), or the Constant Maturity Treasury (CMT) rate.
The purpose of using an external index is to tie the interest rate on the loan to a widely recognized and independently calculated benchmark, rather than being subject to the bank's own pricing or market fluctuations. This helps to ensure that the borrower pays a fair and transparent interest rate on the loan, based on prevailing market conditions.
In the case of the loans listed in the question, only a loan to purchase a home to be used as rental property requires the use of an index beyond the bank's control. This is because rental property loans are considered to be higher risk than loans for owner-occupied homes, due to the increased likelihood of default and the potential for changes in rental income over time. Therefore, lenders typically require a higher interest rate on rental property loans to compensate for the additional risk.
In summary, while adjustable-rate loans may be used for a variety of purposes, only loans for rental properties require the use of an external index to determine the interest rate.