SOLUTION: The margin on an adjustable-rate mortgage is 4.5% and the rate cap is 5% over the life of the loan. If the current index rate is 8.8%, find the maximum overall rate (as a %) of the

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Question 1202142: The margin on an adjustable-rate mortgage is 4.5% and the rate cap is 5% over the life of the loan. If the current index rate is 8.8%, find the maximum overall rate (as a %) of the loan
=_____%

Answer by Theo(13342)   (Show Source): You can put this solution on YOUR website!
the margin is 4.5% and the rate cap is 5% over the life of the loan.
the curent index is 8.8%.
the margin is the amount you pay on top of the index.
the rate cap is is the maximum percent you can go over the index.
i think what this means is that you pay the index rate for a period of years and then your rate can increase periodically until you reach the maximum rate cap.
here's a reference.

https://www.investopedia.com/terms/i/capstructure.asp

applying this to your problem, i get:
the current rate if 8.8%.
you would pay that much for the initial period.
once the initial priod is over, you can pay 4.5% over over the initial rate = 8.8 + 4.5 = 13.3%.
this might be all at once, or in smaller increments, such as maybe 1% or 2% each time it increases.
the rate cap is the maximum the rate can increase over the life of the loan.
this would be equal to 8.8% + 5% = 13.8%.
your solution should be that the maximum rate would be 13.8 over the life of the loan, if i understood what they're saying correctly.

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