Finance
What term describes the process by which a lender reduces the risk of an ARM by capping how much the interest rate can change at each adjustment period and over the life of the loan?
AAmortization
BInterest rate caps✓ Correct
CLoan-to-value limits
DNegative amortization
Explanation
Interest rate caps limit the amount an ARM's rate can increase or decrease at each adjustment and over the loan's lifetime. Periodic caps protect against sudden payment shock, while lifetime caps set an absolute maximum rate.
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