Illinois real estate exam glossary
Adjustable-rate mortgage (ARM)
A low starting rate tells you only part of an ARM’s story. The useful questions are when it can change, which index it uses and how far it can move. For an exam calculation, find those terms before adding any numbers.
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The short answer
An adjustable-rate mortgage, or ARM, has an interest rate that can change under the loan’s terms. Many ARMs start with a fixed introductory period, then use a specified index plus a margin to determine later rates, subject to contractual rounding, caps and floors. A rate change can change the payment. The starting rate, later adjustment frequency and loan maturity are separate terms.
PSI’s June 24, 2026 national outline includes adjustable-rate loans under Financing. That whole area accounts for 10% of the 100 scored national questions, not ten questions on ARMs. These are original teaching questions, not official or recalled PSI items or a validated readiness test. The examples use invented rates and expressly supplied loan terms, not current mortgage offers.
Calculate the rate, then check the payment
- Read the schedule first. Identify the introductory period, first change date, later adjustment interval, maturity and first adjusted-payment due date. Labels such as 5/1 and 5/6m describe a pattern; the note supplies the actual dates and terms.
- Find the exact index and observation rule. Use the named benchmark, the stated lookback date and the required published value. A rate shown today is not automatically the value required for a future change date.
- Name the benchmark precisely. The New York Fed’s SOFR Averages compound SOFR over rolling 30-, 90- or 180-calendar-day periods. A 30-day average is not simply the overnight rate on one day. Not every ARM uses SOFR, and the named averaging period is not necessarily the interval between loan adjustments.
- Add index and margin. An index of 4.80% plus a margin of 2.25 percentage points gives 7.05% before other terms. The margin ordinarily stays as contracted, but an applicable benchmark-replacement clause can specify how it changes.
- Follow the rounding instruction before applying limits in the order the note requires. Do not invent rounding to a whole percent or always round up. The cited Form 3441 rounds the sum to the nearest one-eighth percentage point, then applies its limits; that is a form-specific example.
- Check every applicable boundary. For the first change, use its initial-adjustment cap. For a later change, compare with the prior rate using the subsequent cap. Also apply any lifetime ceiling and floor. A periodic cap does not authorize a rate above the lifetime maximum.
- Read cap shorthand only after its meaning is supplied. If 2/1/5 means first-change, subsequent-change and lifetime-above-initial limits, an initial 4% has a 9% lifetime ceiling from those terms. Do not add every number to get 12%. Limits can constrain decreases too; a lower formula may not be immediately reachable. Interest carryover is a separate feature requiring supporting terms, not permission to invent a higher rate.
- Use the final rate to determine the new payment under the contract. A fully amortizing reset commonly uses expected unpaid principal, the new rate and the remaining term. Escrow, insurance and other amounts are separate. An interest-rate cap alone is not a promise about the entire monthly collection.
- Check the payment structure. Paying all accrued interest without other balance additions leaves principal level. Negative amortization occurs when unpaid interest is added to principal. Neither every ARM nor every low starting payment has that feature.
- Read disclosures for the covered transaction. Loan Estimate and Closing Disclosure AIR tables show applicable rate terms; other features can also require an Adjustable Payment table. Program disclosures and later adjustment notices have separate rules. Do not treat every mortgage or every rate change as subject to one universal deadline.
| Term supplied | What it tells you | Frequent mistake |
|---|---|---|
| 5/1 hybrid ARM | Five introductory years, then possible annual changes | Calling it a five-year maturity |
| 5/6m hybrid ARM | Five introductory years, then possible six-month changes | Reading 6m as six years |
| Index + margin | Formula rate before stated rounding and limits | Using the initial rate as the index |
| First-change cap | Limit applying to the initial adjustment | Using the later-change limit instead |
| Subsequent cap | Limit on later changes, usually measured from the prior rate | Always measuring from the original rate |
| Lifetime cap and floor | Overall permitted rate boundaries | Ignoring a boundary after applying a periodic cap |
| Payment cap | A payment limit under its own terms | Assuming it cancels unpaid interest |
| Lookback rule | Which earlier available index value to use | Automatically using today’s quote |
The distinctions that matter
| Distinction | How it works | What to notice |
|---|---|---|
| Index and margin | The index is the specified external reference; the margin is the contractual spread added to it. | Add the stated values. Do not add principal, escrow or APR. |
| Starting rate and formula rate | The introductory rate can differ from index plus margin, including a discounted or premium start. | A flat index does not guarantee an unchanged rate after the introduction. |
| First and later adjustments | The first adjustment can have a different cap from subsequent adjustments. | Use the initial rate for the first-change comparison and the prior rate for later changes. |
| Rate cap and payment cap | A rate cap limits interest-rate movement. A payment cap limits a payment under its own terms. | A payment limit does not necessarily limit all interest accruing. |
| Percentage points and percent | A rise from 4% to 6% is two percentage points, not a two-percent relative increase. | Add 2.00 points, rather than multiplying 4% by 1.02. |
| Adjustment interval and maturity | A 5/6m label commonly means five introductory years followed by six-month rate adjustments. | It does not mean the debt matures after five years or six months. |
| ARM and step-rate loan | An ARM’s later index-based rates are not all known in advance. A pure step-rate loan has predetermined future rates and periods. | A scheduled increase does not by itself make a loan an index-based ARM. |
| Rate date and payment due date | The new rate can take effect before the first payment calculated at that rate is due. | Read the dates separately; notice windows can use the payment due date. |
| Conversion and refinancing | Conversion uses an option in the existing loan, if provided. Refinancing replaces debt with a new loan. | Neither a conversion option nor future refinancing is guaranteed. |
| Index decline and rate decline | A prior cap can have left the actual rate below an earlier formula. A lower new formula can still exceed that actual rate. | Compare with the rate actually in effect, then apply the limits; do not infer a payment reduction. |
Work through the facts
Add the two rate components
An invented ARM problem gives an index of 4.80% and margin of 2.25 percentage points. It asks for the formula result before rounding or caps.
- Add 4.80 + 2.25 = 7.05.
- This intermediate result is not necessarily the final contract rate.
Answer: 7.05%.
Apply the first-change cap
The initial rate is 4.50%. The first upward change is limited to 2.00 percentage points. The formula result is 7.25%. No other boundary or rounding changes the result.
- The first-change ceiling is 4.50 + 2.00 = 6.50%.
- The 7.25% formula result exceeds that permitted rate.
Answer: 6.50%.
Use the prior rate for a later adjustment
The rate immediately before a later change is 6.50%. Its upward-change cap is 1.00 point and its formula result is 8.00%. No other bound changes the answer.
- Use 6.50 + 1.00 = 7.50%, not the initial rate from years earlier.
- The 8.00% formula result is reduced by this stated limit.
Answer: 7.50%.
Apply the lifetime ceiling too
An adjustment calculation would otherwise permit 9.75%, but the note’s absolute lifetime ceiling is 9.50%. No other bound changes the answer.
- A periodic allowance does not remove the lifetime limit.
- Both conditions must be satisfied.
Answer: The rate cannot exceed 9.50%.
Do not forget a floor
The formula result is 2.75% and the applicable minimum rate is 3.25%. No other term changes the result.
- The supplied floor prevents the rate from falling to 2.75%.
- Do not assume every note uses the same floor or no floor.
Answer: 3.25%.
A flat index can still produce an increase
The introductory rate is 3.00%. At the first reset, the unchanged index is 2.00% and margin is 2.50 points. The introduction expires, and no rounding, cap or floor changes the result.
- The contractual formula is 2.00 + 2.50 = 4.50%.
- The comparison is with a discounted starting rate, not a claim that the index rose.
Answer: The rate becomes 4.50%.
Decode 5/6m
A hypothetical loan is described as a 5/6m hybrid ARM. The question asks only about the usual rate-adjustment pattern.
- The 6m refers to months between later adjustments.
- The label does not supply the maturity, margin, caps or a promise of an increase.
Answer: Five introductory years, followed by possible changes every six months.
Round only as instructed
A note in the problem requires rounding index plus margin to the nearest 0.125 percentage point before applying caps. The sum is 7.05%. No boundary changes the rounded result.
- The adjacent eighth-point values are 7.000% and 7.125%.
- Distances are 0.050 and 0.075 points, so 7.000% is nearer. This is not an always-round-up rule.
Answer: 7.00%.
Read each number in the cap notation
The problem expressly defines 2/1/5 as a two-point first-change cap, one-point subsequent cap and five-point lifetime increase above the initial rate. The initial rate is 4.00%.
- Add only the lifetime allowance to the initial rate: 4.00 + 5.00 = 9.00%.
- The 2 and 1 govern separate adjustments. Adding 4 + 2 + 1 + 5 = 12 would misread the supplied terms.
Answer: The lifetime ceiling is 9.00%, before any other applicable restriction.
A falling index after an earlier capped adjustment
An earlier cap held the actual rate at 6.00% while the earlier formula was 7.25%. The index now falls, making the formula 7.00%. The next upward cap is 1.00 point, and no rounding, floor or other limit changes the result.
- The current actual rate is 6.00%, not the earlier uncapped 7.25% formula.
- The new 7.00% formula is one point above the actual rate and is allowed by the stated cap. This example does not assume a separate interest-carryover provision.
Answer: The new rate can be 7.00%, despite the falling index.
Mistakes to avoid
- Assume the initial rate is the fully indexed rate. The starting rate can be discounted or premium-priced relative to the formula.
- Apply a two-point cap as a 2% multiplication. An upward two-point allowance from 4% reaches 6%, before other applicable terms.
- Use the same cap for every adjustment. First, subsequent and lifetime limits do different work.
- Guarantee a lower payment whenever the index falls. The prior rate, floor, caps, payment terms and other collected amounts still matter.
- Treat a capped payment as capped interest. A payment limit can leave unpaid interest; check whether it is capitalized.
- Promise the borrower can refinance before the reset. Future loan qualification, rates and property value are uncertain.
- Make the generic ARM label control every document. Use the actual benchmark, lookback, rounding, caps, dates and payment provisions.
- Treat an AIR table as proof of an index-based ARM. Pure step-rate increases can also require AIR disclosures. Read the product and terms.
24 questions on ARM rates, limits and payment changes
These are original teaching questions, not recalled or predicted PSI questions. Answer first, then explain why the other choices fail.
1. What is the basic ARM formula before stated rounding, caps or floors?
- Margin minus maturity
- APR plus escrow
- Initial rate plus principal
- Index plus margin
Show answer and explanation
Answer: D. Index plus margin
Add the specified index and contractual margin. The final rate still depends on other applicable terms.
2. What does a 5/1 hybrid ARM label generally describe?
- Five indexes averaged once
- A 5% rate guaranteed forever
- A five-year maturity with one payment
- Five introductory years followed by possible annual rate adjustments
Show answer and explanation
Answer: D. Five introductory years followed by possible annual rate adjustments
The usual label describes the introductory period and later adjustment interval, not the loan’s maturity.
3. An invented index is 4.25% and the margin is 2.50 points. What is their sum before rounding and limits?
- 1.75%
- 10.625%
- 6.75%
- 4.50%
Show answer and explanation
Answer: C. 6.75%
4.25 + 2.50 = 6.75%. Do not multiply the two percentages.
4. The initial rate is 4.00%, the formula result is 7.00% and the first upward adjustment is limited to 2.00 points. With no other binding term, what is the highest resulting rate?
- 4.08%
- 6.00%
- 7.00%
- 9.00%
Show answer and explanation
Answer: B. 6.00%
4.00 + 2.00 = 6.00%. The larger formula result is limited by the first-change cap.
5. What does an absolute lifetime rate ceiling limit?
- The remaining principal to zero
- Only the first monthly payment
- Every tax assessment
- The maximum interest rate over the loan’s life
Show answer and explanation
Answer: D. The maximum interest rate over the loan’s life
An overall ceiling remains relevant even when a periodic cap would allow more. It does not set taxes, insurance or principal.
6. A discounted introductory rate expires. The index stays flat, but index plus margin is higher than that starting rate. With no binding cap or floor, what can happen?
- The rate can increase
- The margin must become zero
- The loan must be forgiven
- The rate must stay unchanged
Show answer and explanation
Answer: A. The rate can increase
A discounted start and the later formula rate differ. An increase does not require an increase in the index in this scenario.
7. Which description of an ARM margin is most accurate?
- It is an escrow balance
- It must change every day
- It is a contractual spread ordinarily set in the note, subject to any applicable replacement terms
- It is the loan’s principal
Show answer and explanation
Answer: C. It is a contractual spread ordinarily set in the note, subject to any applicable replacement terms
The margin differs from the changing index. Do not promise it can never change when the note includes a qualifying benchmark-replacement procedure.
8. For a covered ARM outside the early-payment exception, the general initial-adjustment notice window in Regulation Z 1026.20(d) is measured 210 to 240 days before what?
- The application interview
- The due date of the first payment calculated at the adjusted rate
- The rate-change date in every case
- The end of a late-payment grace period
Show answer and explanation
Answer: B. The due date of the first payment calculated at the adjusted rate
The rule uses the first adjusted-payment due date. If that payment is due within the first 210 days after consummation, paragraph (d) instead requires the disclosure at consummation. Coverage and exemptions matter.
9. Which table identifies applicable index, margin, change frequency and interest-rate limits on covered Loan Estimates and Closing Disclosures?
- The Adjustable Interest Rate (AIR) table
- A title exception schedule
- A property-tax assessment table
- The borrower’s credit-score history
Show answer and explanation
Answer: A. The Adjustable Interest Rate (AIR) table
Regulation Z 1026.37(j) and 1026.38(n) prescribe AIR disclosures. The separate Adjustable Payment table addresses specified other payment changes.
10. Which inputs commonly determine a fully amortizing ARM payment reset under its terms?
- The original down payment alone
- Expected unpaid principal, the final new rate and remaining term
- Property assessment and commission
- Original balance and APR only
Show answer and explanation
Answer: B. Expected unpaid principal, the final new rate and remaining term
A reset must account for the debt then expected to remain and the repayment time left. Escrow and other collections require separate treatment.
11. What does the 6m in a usual 5/6m ARM label describe?
- Six-month intervals between later rate adjustments
- Six-year maturity
- Six percent interest
- Six missed payments allowed
Show answer and explanation
Answer: A. Six-month intervals between later rate adjustments
After the five-year introductory period, the usual later interval is six months. The documents supply actual dates.
12. A prior rate is 6.50%, a later upward cap is 1.00 point and the formula gives 8.00%. No other term binds. What is the new rate?
- 7.50%
- 9.00%
- 6.565%
- 8.00%
Show answer and explanation
Answer: A. 7.50%
The later cap uses the prior rate: 6.50 + 1.00 = 7.50%.
13. A formula gives 2.75%, but the applicable floor is 3.25%. Nothing else binds. What rate applies?
- 3.25%
- 2.75%
- 0.50%
- 6.00%
Show answer and explanation
Answer: A. 3.25%
The stated minimum prevents use of the lower formula rate.
14. A loan otherwise permits 9.75% at a reset, but its absolute lifetime ceiling is 9.50%. What is the maximum permitted by these terms?
- 9.75%
- 9.50%
- 19.25%
- 0.25%
Show answer and explanation
Answer: B. 9.50%
The periodic allowance cannot override the lower overall ceiling.
15. A problem expressly requires nearest-one-eighth-point rounding of a 7.05% formula result before limits. No limit changes it. What results?
- 7.125%
- 8.00%
- 7.00%
- 7.50%
Show answer and explanation
Answer: C. 7.00%
7.05 is 0.050 points from 7.000 and 0.075 from 7.125. Use this stated rule, rather than assuming every ARM rounds the same way.
16. What does an index lookback provision determine?
- The appraiser’s effective date
- The date of the original deed
- Which earlier available index value is used for a rate change
- The borrower’s tax filing date
Show answer and explanation
Answer: C. Which earlier available index value is used for a rate change
The relevant value can be determined before the change date. Today’s quote is not automatically the contract’s required value.
17. A permitted payment covers only part of interest, and the unpaid interest is added to principal. What is happening?
- Full amortization
- Automatic mortgage cancellation
- Negative amortization
- A guaranteed fixed rate
Show answer and explanation
Answer: C. Negative amortization
The balance grows because unpaid interest is capitalized. This is not a feature of every ARM or an automatic result of every short payment.
18. Which statement about an ARM’s monthly collection is correct?
- The rate and payment must always change on the same date
- A rate cap freezes property taxes
- Escrow or insurance can change even if the interest rate does not
- All ARMs have a payment cap
Show answer and explanation
Answer: C. Escrow or insurance can change even if the interest rate does not
Rate terms do not freeze separate taxes or insurance, and the contract can distinguish the rate-change date from a later adjusted-payment due date.
19. A loan has future interest rates and periods fixed in advance, with no index-based adjustment feature. Which label best fits?
- Negative amortization necessarily
- Revolving credit necessarily
- Index-only ARM
- Pure step-rate loan
Show answer and explanation
Answer: D. Pure step-rate loan
Predetermined steps differ from future rates determined by a changing index. A loan can have combined features, so the whole terms matter.
20. Which statement about converting or refinancing an ARM is sound?
- Refinancing is guaranteed before a reset
- Conversion requires an available contractual option; refinancing requires a new loan and its conditions
- Conversion is a right in every ARM
- Refinancing preserves the identical obligation
Show answer and explanation
Answer: B. Conversion requires an available contractual option; refinancing requires a new loan and its conditions
Do not promise a future fixed-rate conversion, approval, low rate or ability to sell. A refinance is a different transaction from exercising an existing option.
21. A problem expressly defines 2/1/5 as first-change, subsequent-change and lifetime-above-initial caps. The initial rate is 4.00%. What is the lifetime ceiling from those terms?
- 5.00%
- 9.00%
- 12.00%
- 7.00%
Show answer and explanation
Answer: B. 9.00%
Only the last number supplies the lifetime increase above the initial rate: 4.00 + 5.00 = 9.00%. Do not add all three limits together. Other stated bounds would still apply.
22. An earlier cap left the current rate at 6.00%, below the earlier 7.25% formula. The index falls, giving a new 7.00% formula. A 1.00-point upward cap applies; no other term changes the result. What is the next rate?
- 5.75%
- 7.00%
- 6.00%
- 8.00%
Show answer and explanation
Answer: B. 7.00%
Compare the new 7.00% formula with the actual prior 6.00% rate. It is within the one-point allowance, so the rate can rise despite the index decline. No interest-carryover clause is needed for these stated facts.
23. Does the presence of an AIR table by itself prove the loan uses a changing index?
- Yes; it proves SOFR is the index
- No; a pure step-rate loan permitting a later rate increase can also require AIR disclosures
- Yes; step-rate loans cannot have an AIR table
- No; every fixed-rate loan must also have AIR
Show answer and explanation
Answer: B. No; a pure step-rate loan permitting a later rate increase can also require AIR disclosures
Regulation Z37j covers permitted rate increases, including scheduled step-rate changes. A pure step-rate product discloses predetermined adjustments instead of an index-and-margin formula.
24. Under published Form3441, what is a qualified possible effect of a partial prepayment?
- P&I may decrease after the next change date, but a rate increase can offset it
- The next due date automatically changes
- The rate must fall at once
- The next required payment must fall immediately
Show answer and explanation
Answer: A. P&I may decrease after the next change date, but a rate increase can offset it
The published form distinguishes a possible later payment effect from an immediate automatic reduction. Its due-date change requires the note holder’s written agreement. This is not a universal term for every loan.
Common questions
What is an adjustable-rate mortgage?
An ARM is a mortgage with a rate that can change under the loan’s terms. Many begin with a fixed introductory period, then use an index and margin. The later rate must also satisfy the applicable rounding, adjustment limits and floor. An ARM can still have a long maturity and an amortizing payment schedule.
How do index and margin work?
The index is the named external reference. The margin is the contractual spread added to it. For example, 4.80% plus 2.25 percentage points gives 7.05% before other terms. The introductory rate can differ from that sum. Use the required benchmark value and lookback, rather than a convenient current quote.
What is the difference between a 5/1 and a 5/6m ARM?
Both usual labels start with a five-year introductory period. A 5/1 then has possible annual rate changes; a 5/6m has possible changes every six months. Neither label supplies the complete loan terms. Read the first change date, later frequency, maturity, index, margin and limits.
What do first, subsequent and lifetime rate caps do?
A first-change cap applies to the initial adjustment. Subsequent caps govern later changes, commonly measured from the preceding rate. A lifetime cap limits the overall rate. Apply all relevant limits and any floor. A two-percentage-point increase from 4% is 6%, rather than a 2% relative increase to 4.08%.
Can an ARM rate rise if the index stays the same?
Yes. An introductory discount can end while the index stays flat. If the starting rate is 3.00%, index is 2.00% and margin is 2.50 points, the uncapped formula gives 4.50%. The final result still depends on the actual rounding, caps and floor.
Does a lower index guarantee a lower payment?
No. Compare the new formula with the rate actually in effect, then apply the floor, caps and payment terms. A prior cap can have kept the current rate below an earlier formula result. Taxes, insurance and changes in payment features can also affect what is collected. Do not promise a lower total payment from the index alone.
Does every ARM use the same rounding and lookback?
No. Read the note. Published Form 3441, dated July 2021, uses its most recently available specified index as of 45 days before a change date, treats a negative index as zero, adds the margin and rounds to the nearest one-eighth point before applying its limits. Those are that form’s provisions, not universal rules for every ARM.
Is the margin fixed forever?
It ordinarily remains as contracted. A qualifying benchmark-replacement clause can provide a process for replacing an unavailable or unreliable index and, in stated circumstances, adjusting the margin. Form 3441 specifies replacement events and a selection procedure. That is different from a lender freely changing the spread whenever it wishes.
When is the first ARM adjustment notice due?
For a covered closed-end consumer ARM secured by the principal dwelling with a term longer than one year, Regulation Z 1026.20(d) generally requires a separate initial notice 210 to 240 days before the first adjusted payment is due. If that payment is due within the first 210 days after consummation, provide it at consummation. Unknown new rates or payments must be identified as estimates.
The clock concerns the adjusted-payment due date, excluding any grace period. It is not a universal deadline for every mortgage product. The separate paragraph (c) payment-change notice has its own coverage, timing and exemptions.
When is a later rate-change notice due?
Under the general rule in Regulation Z 1026.20(c), a covered contractual rate adjustment producing a corresponding payment change requires notice 60 to 120 days before the first adjusted payment is due. Delivery or placement in the mail must occur in the applicable window. This paragraph has exemptions and special timing rules; not every rate event uses that general window.
The rule covers specified closed-end consumer credit secured by the principal dwelling, not every loan secured by any property. An escrow-only change is not a rate adjustment causing a payment change. Read the linked provision for the transaction’s actual coverage and exceptions.
Special timing includes 25 to 120 days for uniformly scheduled adjustments every 60 days or more frequently, and for specified pre-January 10, 2015 ARMs using an index observation less than 45 days before adjustment. For a first adjustment within 60 days of consummation with an estimated new rate disclosed at consummation, notice is due as soon as practicable, at least 25 days before the first adjusted payment. Exemptions include terms of one year or less, a qualifying first adjustment already disclosed without an estimate, and the stated FDCPA cease-communication condition. These are qualifications to paragraph (c), not replacements for every paragraph (d) initial notice.
Where are ARM terms shown on mortgage disclosures?
Covered Loan Estimates use the Adjustable Interest Rate table under Regulation Z 1026.37(j); Closing Disclosures use 1026.38(n). The AIR table gives applicable index and margin, initial rate, minimum and maximum, frequency and adjustment limits. A separate Adjustable Payment table addresses specified payment changes from terms other than rate adjustments. A fixed-rate loan does not get an AIR table merely because escrow can change.
Do all ARMs create negative amortization?
No. Many have fully amortizing payments. Interest-only payments covering all accrued interest leave principal level if nothing else is added. Negative amortization means unpaid interest is added to principal. A payment cap and a rate cap are different; a payment limit does not necessarily prevent that unpaid interest from accruing.
Can I switch an ARM to a fixed rate?
Only rely on a conversion right if the loan provides it and its conditions are met. Refinancing is a separate new loan with qualification, costs and available terms at that time. Neither future refinancing nor selling the property before a reset is guaranteed. A low initial payment is not proof that the later payment will be affordable.
Are these official questions, and is an app download required?
These are original learning questions, not official or recalled PSI questions. A practice percentage is not an official passing score or validated readiness measure. Explain the formula, dates and limits instead of memorizing the answer letter.
Downloading Pass Illinois is optional. Property Ownership practice is free; full access is paid. The app provides exam preparation, not approved pre-license education. The web lesson remains available without downloading.
What does a 2/1/5 cap structure mean?
Only use that reading when the terms define it: two points for the first adjustment, one point for subsequent adjustments and five points above the initial rate over the loan’s life. With an initial 4%, the lifetime ceiling from those terms is 9%, not 12%. The first and later caps still restrict how quickly the rate can get there. Other notes can use different limits or notation.
Is SOFR the same as the index on every ARM?
No. Use the benchmark actually named in the loan. The New York Fed publishes compounded SOFR Averages over rolling 30-, 90- and 180-calendar-day periods, separately from the overnight SOFR rate and its cumulative SOFR Index. A note specifying the 30-day average does not simply call for one day’s overnight rate. The averaging period also differs from the loan’s adjustment interval.
When do the ARM program disclosures and CHARM booklet arrive?
Regulation Z1026.19(b) generally covers loans whose APR may increase after consummation, secured by the principal dwelling and with a term longer than one year, subject to its stated exception. It requires the CHARM booklet or a suitable substitute and disclosures for each variable-rate program in which the consumer expresses an interest.
The general timing is when the application form is provided or before a nonrefundable fee is paid, whichever is earlier. For an application received by telephone or through an intermediary agent or broker, the rule permits delivery or placement in the mail no later than three business days after receipt. This is a different requirement from a Loan Estimate or later adjustment notice; do not reduce all three to one deadline.
Will an extra principal payment immediately lower an ARM payment?
Do not assume so. Properly applied principal reduces the balance, but the contract governs when the required payment changes. Published Form3441 says a partial prepayment may reduce P&I after the next change date, while a rate increase can offset that reduction. Its payment due date does not automatically change; changing it requires the holder’s written agreement.
A voluntary principal-curtailment recast, a contract-required ARM payment reset and refinancing are different events. Fannie Mae’s cited servicing procedure permits specified current-loan recasts under its conditions; it does not promise approval for every mortgage. Check the actual note and applicable servicing requirements.
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Official sources and scope
Official and primary sources reviewed through October 27, 2026, including explicitly identified earlier actual readings. A review date is not a new effective date. Form 3441 illustrates its own published terms, not every mortgage. Examples use invented rates and supplied assumptions; they are not quotes, forecasts, loan approvals or a private servicing review.
- PSI June 24, 2026: National IV.B.3 ARM loans
- CFPB: fixed-rate and ARM comparison
- CFPB: ARM index, margin and fully indexed rate
- CFPB: initial, subsequent and lifetime rate caps
- CFPB CHARM booklet: notation and document map
- Fannie Mae/Freddie Mac Form3441: SOFR note example
- Regulation Z1026.19(b): covered variable-rate program disclosures
- Regulation Z1026.20: covered ARM adjustment notices
- Regulation Z1026.37: AIR and separate payment tables
- Regulation Z1026.38: Closing Disclosure AIR table
- New York Fed: SOFR Averages and Index methodology
- Fannie Mae F-1-09: payment application and qualified re-amortization
This is exam preparation, not advice for a specific transaction. State law and the applicable facts control. Our editorial and corrections process explains how to report an issue.