Mortgage Loan Originator (MLO) Licensing Practice Test 2025 - Free MLO Practice Questions and Study Guide

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What is the adjustment cap for the initial adjustment of an adjustable-rate mortgage (ARM)?

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The initial adjustment cap for an adjustable-rate mortgage (ARM) typically refers to the maximum amount by which the interest rate can increase after the initial fixed-rate period. In many cases, this cap is set at 2%. This means that when the loan adjusts for the first time after the initial period, the interest rate cannot increase by more than 2 percentage points from the original rate. This cap serves as a protective measure for borrowers, preventing sudden and potentially unaffordable increases in their monthly payments.

While there are different types of ARMs and the terms can vary, a 2% initial adjustment cap is quite common in the industry, offering a balance between lender flexibility and borrower security. Understanding this cap is crucial for borrowers to anticipate their potential future payments and for mortgage professionals to give accurate advice regarding loan products.

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