ARM Basics

D

An adjustable rate mortgage (ARM) is a type of home loan where the interest rate varies over time based on changes in a selected index rate. The margin is the percentage point added to the index rate by the lender to determine the rate of interest for the borrower.

To answer this question, we need to understand the basic features of an ARM. The following are the essential elements of an ARM:

1. Adjustment Period: This is the frequency with which the interest rate can be adjusted. For example, if an ARM has an adjustment period of one year, the interest rate can be adjusted every year.

2. Index Rate: This is the benchmark interest rate that the ARM is tied to. Common index rates include the LIBOR (London Interbank Offered Rate) and the Treasury Bill rate.

3. Margin: This is the percentage point that the lender adds to the index rate to determine the rate of interest for the borrower.

4. Payment Caps: These are the limits on how much the borrower's monthly payment can increase during each adjustment period.

5. Lifetime Cap: This is the maximum amount by which the interest rate can increase over the life of the loan.

Now, looking at the answer options:

A. Adjustment Period: This is a basic feature of an ARM and an essential element that borrowers should understand.

B. Index Rate: This is also a critical element of an ARM and a basic feature that borrowers should be aware of.

C. Payment Caps: This is another crucial element of an ARM that borrowers should understand to avoid payment shock.

D. Marginal Rate of Return: The marginal rate of return is not a feature of an ARM. It is a financial concept that refers to the change in the return on an investment caused by a small change in the amount invested.

Therefore, the correct answer is D. Marginal Rate of Return.