Mortgage Loan Originator (MLO) Licensing Practice Test

What is a characteristic of traditional ARMs guaranteed by the VA?

1. No cap on interest rate increases

2. Cap on annual adjustment to 2%

3. 1% limit on annual adjustment with a 5% lifetime cap

4. At least 3% adjustment in the first year

The correct answer is: 1% limit on annual adjustment with a 5% lifetime cap

The characteristic that distinguishes traditional Adjustable Rate Mortgages (ARMs) guaranteed by the VA is that they typically feature a 1% limit on annual interest rate adjustments, coupled with a 5% lifetime cap. This means that each year, the interest rate on the loan can increase by no more than 1%, providing a level of predictability and stability for borrowers concerning their monthly payments. Additionally, over the life of the loan, the interest rate cannot exceed the initial rate by more than 5%, ensuring that borrowers are protected from excessive rate increases throughout the term of the loan. In contrast, options that suggest no cap on interest rate increases or a larger annual adjustment limit do not align with VA guidelines for traditional ARMs, which are designed to ensure borrower protection within reasonable limits. Therefore, the correct answer reflects the VA's commitment to balancing the lender's need for variable rates with borrower safety regarding potentially escalating costs.