A borrower has a 3/1 ARM with a 2/2/5 cap structure. If the current rate is 4.0% and the fully indexed rate at the next adjustment is 7.5%, what will the new rate be?
Correct Answer
A) 6.0%
With a 2/2/5 cap structure, the first number (2) represents the initial adjustment cap. The rate can only increase by 2% at the first adjustment, so 4.0% + 2.0% = 6.0%, even though the fully indexed rate is 7.5%.
Why This Is the Correct Answer
With a 2/2/5 cap structure, the first number (2) represents the initial adjustment cap. The rate can only increase by 2% at the first adjustment, so 4.0% + 2.0% = 6.0%, even though the fully indexed rate is 7.5%.
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