A borrower with a 7/1 ARM has an initial rate of 3.5%, a margin of 2.75%, and a 2/2/5 cap structure. After 7 years, the index is 4.0%. What is the new interest rate?

Correct answer: 5.5%

The 2/2/5 cap structure means: 2% initial adjustment cap, 2% periodic cap, 5% lifetime cap. After the initial period: Index (4.0%) + Margin (2.75%) = 6.75%. But the initial adjustment cap is 2%, so: 3.5% + 2% = 5.5% maximum. The rate is 5.5%.