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A borrower has an ARM with an initial rate of 4.0%, a margin of 2.5%, and a 2/2/5 cap structure. The index is currently 3.0%. After the first adjustment, what is the new rate?

General Mortgage Knowledge · 20% of the SAFE exameasy

9.0% 6.5% 5.5% 6.0%

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Correct answer: 5.5%

Index (3.0%) + Margin (2.5%) = 5.5%. The first adjustment cap is 2%, meaning the rate cannot increase more than 2% from the initial 4.0% (max 6.0%). Since 5.5% is within the 2% cap, the new rate is 5.5%.