If an ARM has a start rate of 5% with a 2/3 cap, what is the highest rate it can reach on one adjustment?

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In an adjustable-rate mortgage (ARM) that has a start rate of 5% and a 2/3 cap, understanding the application of the cap is crucial to determining the maximum possible interest rate after one adjustment.

The start rate is the initial interest rate charged, which in this case is 5%. The 2/3 cap indicates that the interest rate can increase by a maximum of 2% in the first adjustment period. Therefore, to find the highest rate it can reach after one adjustment, you simply add the maximum increase allowed by the cap to the start rate.

By taking the start rate of 5% and adding the maximum increase of 2%, the calculation would be:

5% (start rate) + 2% (maximum increase due to 2/3 cap) = 7%.

Therefore, the highest rate it can reach on one adjustment is 7%. This clearly illustrates how rate caps function in ARMs and underscores the importance of being aware of both the initial rate and the conditions of any potential rate adjustments.

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