If you have an adjustable rate mortgage with an initial rate of 4 percent, an annual interest rate cap of 1 percentage point, and a lifetime cap of 5 percentage points, what is the maximum annual interest rate you could end up paying on the ARM?

Given Information:

Lifetime cap  = 5 %

Initial interest rate = 4 %

Periodic adjustment rate = 1%

Required Information:

Maximum annual interest rate = ?

Maximum annual interest rate = 9%

Explanation:

In adjustable rate mortgage scheme, lifetime cap is the maximum limit that is allowed after the initial the interest rate. The periodic adjustment rate is 1% and it is the maximum adjustment allowed in one year.

Maximum annual interest rate = Initial interest rate + Lifetime Cap

Maximum annual interest rate = 4% + 5%

Maximum annual interest rate = 9%

Therefore, maximum annual interest rate you could end up paying on the ARM is 9%

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