In a 5/1 ARM with a cap structure of 2/1/2, what is the maximum first-adjustment increase allowed?

In a 5/1 ARM with a cap structure of 2/1/2, what is the maximum first-adjustment increase allowed?

• A. 2 percentage points
• B. 1 percentage point
• C. 2.5 percentage points
• D. 3 percentage points

Answer: (A)

The main idea here is understanding how the cap structure controls how much the rate can move at each adjustment after the fixed period. In an ARM described by 2/1/2, the first number is the limit on the initial adjustment. That means when the rate first resets after the fixed period, it cannot increase by more than that initial cap amount, no matter what the index suggests. After that first adjustment, further yearly adjustments are limited by the second figure (the periodic cap), and the total lifetime increase is limited by the third figure (the lifetime cap). So the maximum first-adjustment increase is determined by that initial cap amount—the first figure in the 2/1/2 sequence.

The main idea here is understanding how the cap structure controls how much the rate can move at each adjustment after the fixed period. In an ARM described by 2/1/2, the first number is the limit on the initial adjustment. That means when the rate first resets after the fixed period, it cannot increase by more than that initial cap amount, no matter what the index suggests. After that first adjustment, further yearly adjustments are limited by the second figure (the periodic cap), and the total lifetime increase is limited by the third figure (the lifetime cap).

So the maximum first-adjustment increase is determined by that initial cap amount—the first figure in the 2/1/2 sequence.