What is the term for the maximum limit on how much an adjustable rate can change?

What is the term for the maximum limit on how much an adjustable rate can change?

• A. Rate Adjustment
• B. Cap
• C. Margin
• D. Floor

Answer: (B)

The term for the maximum limit on how much an adjustable rate can change is "cap." A cap is a critical feature in adjustable-rate mortgages (ARMs) and refers specifically to the limits set on how much the interest rate can increase at each adjustment period and over the life of the loan. For example, if an ARM includes a cap of 2%, and the interest rate adjusts after the initial fixed period, it cannot increase by more than 2% at that adjustment point, providing borrowers with a level of predictability and protection against large spikes in their loan payments. Understanding the concept of caps is important for borrowers as it helps them evaluate the risks associated with their mortgage options, giving them insight into how rising interest rates could affect their financial situation. While rate adjustments refer to the frequency and amount by which the interest rates can change, margins denote the fixed percentage added to the index value to determine the new rate, and floors are the minimum interest rate limits imposed on a loan. These terms all play a role in defining the structure of adjustable-rate mortgages, but the cap specifically addresses the maximum increase limit, making it the correct answer.

The term for the maximum limit on how much an adjustable rate can change is "cap." A cap is a critical feature in adjustable-rate mortgages (ARMs) and refers specifically to the limits set on how much the interest rate can increase at each adjustment period and over the life of the loan.

For example, if an ARM includes a cap of 2%, and the interest rate adjusts after the initial fixed period, it cannot increase by more than 2% at that adjustment point, providing borrowers with a level of predictability and protection against large spikes in their loan payments. Understanding the concept of caps is important for borrowers as it helps them evaluate the risks associated with their mortgage options, giving them insight into how rising interest rates could affect their financial situation.

While rate adjustments refer to the frequency and amount by which the interest rates can change, margins denote the fixed percentage added to the index value to determine the new rate, and floors are the minimum interest rate limits imposed on a loan. These terms all play a role in defining the structure of adjustable-rate mortgages, but the cap specifically addresses the maximum increase limit, making it the correct answer.