A 7/1 ARM is in its 9th year. The current rate is 6.5%, the fully indexed rate is 4.8%, and the loan has 2/2/5 caps with a 4% floor. What is the lowest rate the borrower could pay at this adjustment?
Correct Answer
B) 4.5%
The loan has 2/2/5 caps, where the second '2' represents the periodic adjustment cap. The rate can only decrease by 2 percentage points per adjustment period. From 6.5%, the maximum decrease is to 4.5%. Even though the floor is 4% and the fully indexed rate is 4.8%, the periodic cap limits the decrease to 4.5%.
Why This Is the Correct Answer
The loan has 2/2/5 caps, where the second '2' represents the periodic adjustment cap. The rate can only decrease by 2 percentage points per adjustment period. From 6.5%, the maximum decrease is to 4.5%. Even though the floor is 4% and the fully indexed rate is 4.8%, the periodic cap limits the decrease to 4.5%.
More Mortgage Knowledge Questions
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