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.When this loan starts adjusting, how many times will this loan adjust in a 12-month period?

A. 1
B. 2
C. 12
D. 9

Answer 1

An adjustable-rate mortgage (ARM) with 2/1/6 caps will adjust once in a 12-month period.

Step-by-step explanation:

An adjustable-rate mortgage (ARM) is a type of loan used to purchase a home in which the interest rate varies with the rate of inflation.

In this case, the borrower took out a 7/1 ARM, which means the interest rate stays fixed for the first 7 years and then adjusts annually after that. The 2/1/6 caps mean that the interest rate can increase or decrease by a maximum of 2 percentage points at each adjustment period, with a lifetime cap of 6 percentage points in total.

Since this loan adjusts annually, it will adjust once every year after the initial 7-year fixed period. Therefore, in a 12-month period, this loan will adjust 1 time. So the correct answer is A. 1.