Finance
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?
AThe initial fixed period of 5 years
BThe maximum lifetime adjustment above the initial rate✓ Correct
CThe margin added to the index
DThe number of years before the loan can be paid off
Explanation
In ARM cap notation (2/2/5): the first number is the maximum initial adjustment (2%), the second is the maximum per-adjustment-period cap (2%), and the third is the lifetime cap (5%). The lifetime cap means the rate can never increase more than 5% above the initial rate.
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