The margin on an adjustable-rate mortgage is \( 5.5 \% \) and the rate cap is \( 6.55 \% \) over the life of the loan. If the current index rate is \( 6.25 \% \), what is the calculated interest rate of the ARM? Select one: a. \( 11.0 \% \) b. \( 11.75 \% \) c. \( 9.25 \% \) d. \( 12.2 \% \)

To calculate the interest rate on the adjustable-rate mortgage (ARM), you add the margin to the current index rate. The margin is 5.5%, and the current index rate is 6.25%. So the calculation would be: \( 6.25\% + 5.5\% = 11.75\% \). Thus, the correct answer is b. \( 11.75 \% \). Now, let's dive a bit deeper! Did you know that adjustable-rate mortgages are designed to provide a lower initial interest rate compared to fixed-rate mortgages? This lower rate can make them appealing to homebuyers looking for lower monthly payments in the short term. However, borrowers need to keep an eye on how potential fluctuations in interest rates can affect their long-term financial commitment! Choosing the right mortgage is crucial, and adjustable-rate mortgages come with their own set of potential pitfalls. One common mistake is not understanding the terms of the rate cap. Many borrowers mistakenly believe their payments won’t escalate beyond the cap amount, but if they don’t plan for eventual rate adjustments, they might find their finances unexpectedly strained when the rates go up!