Finance
What is an 'interest rate cap' in an adjustable-rate mortgage and why does it matter for Nevada borrowers?
AA cap set by the Nevada government on maximum mortgage interest rates
BA limit on how much the interest rate can increase — periodic caps limit adjustments per period (e.g., 2% per year), lifetime caps limit total adjustment over the loan term (e.g., 6% above initial rate) — protecting borrowers from unlimited rate increases✓ Correct
CA cap that prevents the rate from ever increasing in Nevada ARMs
DInterest rate caps only apply to commercial mortgages in Nevada
Explanation
ARM interest rate caps protect borrowers from extreme payment shocks. Common cap structure: 2/2/5 — initial adjustment cap (2%), subsequent annual cap (2%), lifetime cap (5%).
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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.
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.
AmortizationThe 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.
Math Concepts
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