Your mortgage is an ARM with a 1 year adjustment interval,4% margin,and a 2% periodic cap.Your initial APR on this loan was 4.5%.Over the last 5 years the market rates of interest have risen dramatically.The current interest rate index for your loan is 8.5 %.What APR are your monthly payments being calculated on today?
A)4.5%
B)8.5%
C)10.5%
D)12.5%

Question

Quizplus · Accepted Answer

Since the interest rate index for the loan is 8.5%, and the margin is 4%, the fully indexed rate would be 12.5% (8.5% + 4%). However, the periodic cap on the loan is 2%, which means that the loan interest rate cannot increase more than 2% per year. Therefore, the new APR would be 10.5% (4.5% initial APR + 2% periodic cap increase for each year, for a total of 10% increase) and not the fully indexed rate of 12.5%.

Your Mortgage Is an ARM with a 1 Year Adjustment