Question

The component of an adjustable rate mortgage (ARM) that limits the percentage that the interest rate may increase over a specific time period. usually a year is:

A. the margin
B. the life-of-the loan rate cap
C. the payment cap
D. the rate cap

Answer 1

The rate cap is the component in an adjustable rate mortgage (ARM) that limits the percentage the interest rate can increase over a specific time period.

Step-by-step explanation:

The component of an adjustable rate mortgage (ARM) that limits the percentage that the interest rate may increase over a specific time period is the rate cap.

The rate cap sets a maximum limit on how much the interest rate can increase during a certain period, typically a year. It protects borrowers from significant interest rate fluctuations and helps them budget for their mortgage payments.

For example, if the rate cap is set at 2%, it means that even if market interest rates rise by 3% in a year, the interest rate on the ARM can only increase by a maximum of 2%.