Mortgage Loan Originator (MLO) Licensing Practice Test

In adjustable-rate mortgages (ARMs), after the initial fixed-rate period, the interest rate is adjusted based on an index plus a margin. The margin represents the lender's profit and the costs associated with making the loan.

The typical margin added to an index after the initial fixed rate period for ARMs usually falls within the range of 2.5% to 3%. This margin is a critical element as it determines how much the borrower will pay over the fluctuating index rate that typically reflects market conditions, like the LIBOR or the Treasury index.

Margins in this range help lenders cover risks associated with fluctuating rates and variations in market conditions, while still allowing them to offer a competitive interest rate to the borrower. Hence, the option that states 2.5-3% is aligned with industry standards and typical practices regarding adjustable-rate mortgages.