What is most likely to happen to an adjustable-rate mortgage in a decreasing int

Question

What is most likely to happen to an adjustable-rate mortgage in a decreasing interest rate environment?

A. The borrower's payments will increase.

B. The borrower's payments will decrease.

C. The mortgage is more likely to default.

D. The maturity of the loan will be extended.

E. The principal of the loan will increase.

An ARM has a 5/2 cap (i.e., the rate cannot increase more than 2 percent per year and more than 5 percent over the life of the mortgage). What will the mortgage rate be after three years if the initial rate is 6%, and interest rates increase by 2% in each of the first three years of the contract?

A. 8%

B. 9%

C. 10%

D. 11%

E. 12%

Explanation / Answer

1.

Option B is correct.

The borrower's payments will decrease.

2.

Option D is correct.

Rate can not increase more then 5 % in its lifetime. Therefore Rate can not be more than 6 % + 5 % = 11%

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