What will the interest rate adjust to for the first adjustment on a 5/1 ARM with an initial rate of 3.25%, caps of 2/1/2, index 3%, and margin 2.5%?

What will the interest rate adjust to for the first adjustment on a 5/1 ARM with an initial rate of 3.25%, caps of 2/1/2, index 3%, and margin 2.5%?

• A. 5.5%
• B. 6.25%
• C. 4.25%
• D. 5.25%

Answer: (D)

The rate movement on an ARM is tied to the index plus the margin, but falls under caps that limit how much the rate can change at the first adjustment. Here, the rate would be index plus margin: 3% + 2.5% = 5.5%. The first adjustment cap allows a maximum increase of 2 percentage points above the initial rate, so from 3.25% the highest allowed is 3.25% + 2% = 5.25%. Since 5.5% would exceed this cap, the rate is limited to 5.25% at the first adjustment.

The rate movement on an ARM is tied to the index plus the margin, but falls under caps that limit how much the rate can change at the first adjustment. Here, the rate would be index plus margin: 3% + 2.5% = 5.5%. The first adjustment cap allows a maximum increase of 2 percentage points above the initial rate, so from 3.25% the highest allowed is 3.25% + 2% = 5.25%. Since 5.5% would exceed this cap, the rate is limited to 5.25% at the first adjustment.