A borrower in California is comparing adjustable-rate mortgage (ARM) options. One lender offers a 5/1 ARM with a 2/6 cap structure. What does the 2/6 cap structure mean for this California deed of trust loan?
Correct Answer
A) The initial interest rate can increase by up to 2% at the first adjustment, with a lifetime cap of 6% over the start rate
In a 2/6 cap structure, the 2 represents the periodic adjustment cap (maximum rate increase at each adjustment period), and the 6 represents the lifetime cap (maximum total increase over the initial rate for the life of the loan). In California, this ARM would be secured by a deed of trust.
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Related Topics & Key Terms
Key Terms:
Related Concepts
Usury is the practice of charging an interest rate that exceeds the maximum rate permitted by state law. Usury laws protect borrowers from excessive interest charges on loans.
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
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