A 5/1 ARM starts at 4.25% with caps of 2/2/6. At the first adjustment the index plus margin computes to 8.10%. What interest rate applies at the first adjustment after the initial cap is applied?
Correct Answer
A) The rate goes to 6.25%, since the first adjustment is capped at 2 points
A. The first adjusted rate is capped at 6.25%. The first-adjustment ceiling is 4.25% + 2 percentage points = 6.25%. The calculated 8.10% rate is above that ceiling. The lifetime ceiling of 10.25% does not override the tighter first-adjustment limit. Scope and exceptions: The 2/2/6 terms are scenario inputs. Caps constrain changes; they do not force a maximum increase when the calculated rate is lower. Rate caps and payment caps are not interchangeable. Source: Initial and lifetime adjustment caps — https://www.consumerfinance.gov/ask-cfpb/what-are-rate-caps-with-an-adjustable-rate-mortgage-arm-and-how-do-they-work-en-1951/
Why This Is the Correct Answer
A. The first adjusted rate is capped at 6.25%. The first-adjustment ceiling is 4.25% + 2 percentage points = 6.25%. The calculated 8.10% rate is above that ceiling. The lifetime ceiling of 10.25% does not override the tighter first-adjustment limit. Scope and exceptions: The 2/2/6 terms are scenario inputs. Caps constrain changes; they do not force a maximum increase when the calculated rate is lower. Rate caps and payment caps are not interchangeable.
Why the Other Options Are Wrong
Option B: The rate goes to 4.25%, because the first reset carries no adjustment
The initial fixed-rate period ending does not mean the rate stays fixed.
Option C: The rate goes to 8.10%, as the fully indexed rate governs at reset
It ignores the initial cap.
Option D: The rate goes to 10.25%, being the 4.25% start rate plus the 6-point cap
It mistakes a lifetime maximum for the rate at the first reset.
Exam Tip
At the first reset, use the initial-adjustment cap, not just the lifetime limit.
More Mortgage Knowledge Questions
In a closing-readiness check, a risk reviewer sees facts tied to TILA Truth in Advertising. What should the file reflect?
In a training scenario, a trainee asks which official source controls FHA single-family origination policy. What action best follows the rule?
A compliance analyst compares the file facts with LTV Ratio Calculation during a licensing team review. Which conclusion is accurate?
A branch manager asks about a loan file because a trainee asks which official source controls FHA single-family origination policy. What should happen?
The loan team compares the file facts with ARM Cap Structures during a borrower follow-up call. Which conclusion is accurate?
A borrower has a 30-year fixed-rate mortgage with monthly principal and interest of $1,450. Property taxes increase, and taxes are paid through escrow. What can happen to the total monthly payment?
A loan has an outstanding principal balance of $240,000 and a 6% annual interest rate. Using simple monthly accrual, how much interest accrues for one month?
An annual escrow analysis for a current borrower shows a $780 shortage. One month's escrow payment is $600. The servicer elects to require repayment over the shortest installment period permitted by Regulation X for this shortage. What schedule is permitted?
What does an amortization schedule show for each scheduled payment?
A monthly principal-and-interest payment is $1,800, of which $1,250 is interest. How much principal is paid that month?
People Also Study
Federal Mortgage-Related Laws
24% of exam
Mortgage Loan Origination Activities
27% of exam
Ethics, Fraud & Consumer Protection
18% of exam
Uniform State Test Content
11% of exam
Related Study Resources
Previous Question
A mortgage file is paused during a risk-control review because of Income Documentation and Verification. Which answer should explain the required action to the team?
Next Question
During a post-application update, an operations lead encounters a PITI Components issue. Which response should choose the most defensible file action?