Question

Help me out??
A bank advertises an adjustable rate mortgage with the following terms:

20 year 4/1 ARM at 3% with a 3/7 cap structure

What are the maximum interest rates for the 5th year and for the life of the mortgage?

5th year: 6%; Lifetime: 7%

5th year: 6%; Lifetime: 10%

5th year: 4%; Lifetime: 7%

5th year: 4%; Lifetime: 11%

Answer 1

@elizabethvilleda @Nurali

Answer 2

@ankit042

Answer 3

@jim_thompson5910

Answer 4

the part " 4/1 ARM" means that for the first four years, the interest rate is fixed at 3%

after the 4th year, the interest rate will increase by some amount every 1 year

Answer 5

the portion that says " 3/7 cap structure" means that the interest rate will increase by 3% each year and it will increase a max of 7% overall (through the life of the loan)

Answer 6

woah lol ok.. now what

Answer 7

yeah it's a lot to take in

Answer 8

haha im still learning but you always explain very well

Answer 9

the key thing to take away from it is that you start at 3%, then you increase by 3% to get to 3+3 = 6% interest rate for year 5

Answer 10

gotcha

Answer 11

the overall increase is maxed out at 7%, so you just add this to the initial interest rate to get your final interest rate

Answer 12

ok

Answer 13

so what's the max lifetime interest rate? ie the final interest rate

Answer 14

im trying to calculate i cant seem to get the answer .

Answer 15

just add the initial rate to 7

Answer 16

whats the initial rate ?

Answer 17

you tell me

Answer 18

it's the starting interest rate

Answer 19

ahhhh im so stuckk

Answer 20

look at my explanation and tell me the initial interest rate

Answer 21

3%?

Answer 22

yes, add that to 7% to get your second answer

Answer 23

10%

Answer 24

yep

Answer 25

so its B?

Answer 26

yep