Final answer:
The next adjusted rate for the ARM will be 2.25%, which is the sum of the margin (2%) and the index rate (0.25%), and well below the cap maximum of 7%.
Step-by-step explanation:
The student is asking about the adjustment of the interest rate on an Adjustable Rate Mortgage (ARM) which currently has a rate of 5% that will adjust next month. The loan has a 2/5 cap, a margin of 2%, and is based on an index that is currently at 0.25%. To calculate the next adjusted rate we must add the index rate to the margin. However, the rate adjustment cannot exceed the cap set on the loan.
Calculation:
- Current index rate: 0.25%
- Margin: 2%
- Rate Cap: 2% increase maximum (initial change cap)
Given these figures, the new interest rate would be the sum of the index rate and the margin, which equals 2% + 0.25% = 2.25%. But because the current rate is 5% and the cap for the increase is 2%, the highest possible new rate cannot exceed 7% (current rate 5% + cap 2%). Therefore, the next adjusted rate would be 2.25%, since this is less than the capped maximum of 7%.