With an initial rate of 3.75%, index of 2.5%, and a margin of 2.25% in a cap structure of 2/1/2, what is the rate at the first adjustment?

With an initial rate of 3.75%, index of 2.5%, and a margin of 2.25% in a cap structure of 2/1/2, what is the rate at the first adjustment?

• A. 4.50%
• B. 4.75%
• C. 5.75%
• D. 4.25%

Answer: (B)

Understanding how adjustable-rate mortgage caps work. The new rate is index plus margin, so with an index of 2.5% and a margin of 2.25%, the calculated rate becomes 4.75%. The 2/1/2 cap structure means the first adjustment cannot rise more than 2 percentage points above the rate in effect before the adjustment (the initial rate was 3.75%), giving a maximum of 5.75% at the first change. Since 4.75% is within that limit, the rate at the first adjustment is 4.75%. (Periodic caps and the lifetime cap would apply to subsequent changes and total changes over the loan’s life.)

Understanding how adjustable-rate mortgage caps work. The new rate is index plus margin, so with an index of 2.5% and a margin of 2.25%, the calculated rate becomes 4.75%. The 2/1/2 cap structure means the first adjustment cannot rise more than 2 percentage points above the rate in effect before the adjustment (the initial rate was 3.75%), giving a maximum of 5.75% at the first change. Since 4.75% is within that limit, the rate at the first adjustment is 4.75%. (Periodic caps and the lifetime cap would apply to subsequent changes and total changes over the loan’s life.)