A borrower has a 5/1 ARM with a 2/2/5 cap structure and a start rate of 3.5%. After the first adjustment, the fully indexed rate is 7.8%. What is the maximum rate the borrower can be charged at the first adjustment?
Correct Answer
A) 5.5%
With a 2/2/5 cap structure, the first number (2) represents the initial adjustment cap. The borrower's rate can only increase by a maximum of 2 percentage points at the first adjustment, from 3.5% to 5.5%, regardless of what the fully indexed rate calculates to be.
Why This Is the Correct Answer
With a 2/2/5 cap structure, the first number (2) represents the initial adjustment cap. The borrower's rate can only increase by a maximum of 2 percentage points at the first adjustment, from 3.5% to 5.5%, regardless of what the fully indexed rate calculates to be.
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