Finance
A New Jersey homeowner with an adjustable-rate mortgage is concerned about payment increases. The cap structure '2/2/6' means:
AMaximum 2% initial adjustment, 2% per subsequent adjustment, 6% lifetime cap✓ Correct
B2-year fixed period, 2% margin, 6% index
C2% origination fee, 2-point discount, 6% start rate
D2-month adjustment period, 2% floor, 6% ceiling
Explanation
ARM cap structures are expressed as initial/periodic/lifetime. A 2/2/6 cap means the rate cannot increase more than 2% at the first adjustment, 2% at each subsequent adjustment, and no more than 6% above the start rate over the loan's life.
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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.
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