Question

Colton is buying a home and wants to apply for an adjustable-rate mortgage. His mortgage broker offers him a 5/1 ARM at 4.1% with a 2/12 cap. If Colton chooses this mortgage, what is the maximum interest rate his broker may charge him during the sixth year?

Answer 1

5/1 ARM means that it it the intial rate for 5 years, then changes each 1 year afterwards

2/12 cap means that it can rise at most 2% each time, but no more than 12% overall

Answer 2

Year 1 : 4.1 %
Year 2 : 4.1 %
Year 3 : 4.1 %
Year 4 : 4.1 %
Year 5 : 4.1 % + 2% = 0.061 <-----

Answer 3

year 5 ends with 4.1%, year 6 starts with at most 6.1% yes