A borrower obtains an ARM with a start rate of 2%. The ARM has an initial cap of 1%, a periodic cap of 2%, and a lifetime cap of 4%. Assume that the ARM will adjust three times, and that at each adjustment, the rate will increase by the maximum amount possible. What is the maximum amount that the interest rate can reach

6%

Explanation:

The computation of the maximum amount that the interest rate can reach is shown below:

Since the arm rate is increased from 2% to 3% at the first adjustment

Now at the second adjustment, it increased from 3% to 5%

At the third adjustment, it increased from 5% to 7%

So here the interest rate should be

= 2% + 4%

= 6%

Also it can never be more than 6%

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