Question

A borrower takes out a 7/1 ARM with 2/1/6 caps and a start rate of 3.5%. The margin is 4% and the loan is for $200,000 on a 30-year term. The index is based on the LIBOR.If the next Adjustment Period the LIBOR 2% - what is the max the rate could adjust to on this loan?

A. 5.5%
B. 7.5%
C. 3.5%
D. 11.5%

Answer 1

The maximum rate the ARM could adjust to is 5.5%.

Step-by-step explanation:

To calculate the maximum rate the ARM could adjust to, we need to consider the caps for adjustment. The 2/1/6 caps mean that the rate can adjust by a maximum of 2% in the first adjustment period, 1% in subsequent adjustment periods, and 6% over the life of the loan.

So, if the initial rate is 3.5% and the LIBOR increases by 2%, the maximum rate the ARM could adjust to would be 3.5% + 2% (first adjustment cap) = 5.5%.