What is an example of an adjustment rate cap in an ARM loan?

In an adjustable-rate mortgage (ARM), an adjustment rate cap is a limitation placed on how much the interest rate can change at each adjustment period, as well as the maximum increase over the life of the loan. The correct choice specifies an adjustment cap of 2% per year for annual adjustments and a lifetime cap of 6%, meaning that no matter how market rates fluctuate, the interest rate on this loan can never increase by more than 2% in any single year or exceed a total increase of 6% over the life of the loan.

This structure provides borrowers with a level of predictability and protection against severe interest rate increases, making it an essential feature for managing mortgage costs. The other options propose different combinations of annual and lifetime caps, but the first choice is the only one that combines a typical annual rate cap with a reasonable lifetime cap, reflecting common structuring in ARMs that balances borrower protection with lender risk. The absence of adjustment rate caps, as indicated in one option, would leave borrowers vulnerable to unpredictable and potentially high increases in interest rates, which can lead to financial strain.