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A 5/1 ARM with 2/2/5 caps starts at 5.50%. At the first adjustment, the index plus margin equals 8.25%. What will the new rate be?
The new rate is the fully indexed rate (8.25%) unless a cap limits it. The initial adjustment cap is 2 points, so the rate can rise to at most 5.50% + 2.00% = 7.50%. The lifetime cap (5.50% + 5.00% = 10.50%) does not bind here. Caps keep the rate below the fully indexed rate in this period. 9.50% applies both the initial and the periodic cap at the first change. Source: Mortgage industry terminology; ARM cap structure (as at 11 Oct 2026).
Applying the fully indexed rate without checking the adjustment cap.
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