What is an 'interest rate cap' on an adjustable-rate mortgage and why does it matter?
Why Limits on how much the interest rate can increase per adjustment period and over the life of the loan — protecting borrowers from extreme payment increases Is Correct
Answer B: Limits on how much the interest rate can increase per adjustment period and over the life of the loan — protecting borrowers from extreme payment increases
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
The gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
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.
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.
Private Mortgage Insurance (PMI)Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.
Math Concepts
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