FinanceIntermediateAlabama Exam

An adjustable-rate mortgage (ARM) with a 2/2/5 cap structure means:

AThe rate adjusts every 2 years with a 5% total cap

BThe initial adjustment is capped at 2%, periodic adjustments at 2%, lifetime cap at 5%Correct

CThe loan has a 2-year fixed period, 2-year adjustment period, 5-year term, in most cases

DThe rate can increase 5% in the first two adjustments

Why The initial adjustment is capped at 2%, periodic adjustments at 2%, lifetime cap at 5% Is Correct

Answer B: The initial adjustment is capped at 2%, periodic adjustments at 2%, lifetime cap at 5%

A 2/2/5 ARM cap means: the first adjustment is capped at 2% above the start rate, each subsequent adjustment is capped at 2%, and the lifetime cap limits the rate to 5% above the initial rate.

Exam Tip: Finance

Finance questions often involve calculations. Master the T-bar method, understand the difference between conventional and government-backed loans, and know key ratios like LTV and DTI.

Key Finance Terms in This Question

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.

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Key Terms to Know

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.

Amortization

The gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.

Loan-to-Value Ratio (LTV)

The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.

Discount Points

Prepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.

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