Which statement about rate caps on ARMs is true?

Which statement about rate caps on ARMs is true?

• A. Rate caps apply only to the initial adjustment.
• B. Rate caps limit only the rate but not the payment.
• C. Rate caps limit both how much the rate and payment can adjust at each adjustment or over the life of the loan.
• D. Rate caps are optional and rarely affect borrowers.

Answer: (C)

Rate caps limit how much the interest rate can change at each adjustment and over the life of an ARM. Because the monthly payment is tied to the rate, capping the rate also limits how much the payment can change, helping prevent sudden payment shocks. While some loans may have a separate payment cap, the essential effect of rate caps is that they constrain both rate movements and the resulting payment adjustments.

Rate caps limit how much the interest rate can change at each adjustment and over the life of an ARM. Because the monthly payment is tied to the rate, capping the rate also limits how much the payment can change, helping prevent sudden payment shocks. While some loans may have a separate payment cap, the essential effect of rate caps is that they constrain both rate movements and the resulting payment adjustments.