Question

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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?

4.1%

5.1%

6.1%

16.1%

Answer 1

@Quiroz15Army @welshfella @FEARLESS_JOCEY @radar @SolomonZelman @sleepyjess @skullpatrol @Samus_Aran @nincompoop @Night-Watcher @mathmate

Answer 2

What do you think the answer is?

Answer 3

4.1%

Answer 4

Well, 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... okay?

Answer 5

Okay

Answer 6

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

Answer 7

So that means that year 5 ends with 4.1%, year 6 starts with at most 6.1%

Answer 8

What do you think the answer is now?

Answer 9

OK, 6.1%

Answer 10

Correct!!

Answer 11

Thanks! Fanned, Medaled and wrote a testimonial!