An adjustable-rate mortgage (ARM) in Colorado has an initial rate of 5% for 5 years, then adjusts annually. The note says '5/1 ARM with 2/2/5 caps.' What does '5' in the '2/2/5' represent?
Why The maximum lifetime adjustment above the initial rate Is Correct
Answer B: The maximum lifetime adjustment 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
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Key Terms to Know
A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
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.
Promissory NoteA written promise to repay a loan under specified terms — the borrower's personal financial obligation in a real estate transaction.
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