Florida Real Estate Broker ExaminationReal Estate Finance and InvestmentEasy
A Florida investor is purchasing a commercial property and wants to ensure that the interest rate on their loan will not exceed a certain percentage, regardless of market fluctuations. Which mortgage feature best addresses this concern?
- ADue-on-sale clause
- BInterest rate cap
- CPrepayment penalty
- DAmortization schedule
Show answer & explanationAnswer & explanation
Correct answer: B. Interest rate cap
An interest rate cap sets an upper limit on how high the interest rate can increase over the life of an adjustable-rate mortgage, protecting the borrower from excessive payment increases.
Why the other options are wrong
- A. A due-on-sale clause requires the loan to be paid upon sale, not related to interest rate protection.
- C. A prepayment penalty charges the borrower for paying off the loan early, unrelated to rate caps.
- D. An amortization schedule details loan payments over time, but doesn't limit interest rate increases.
Interest Rate Cap
An interest rate cap is a provision in an adjustable-rate mortgage (ARM) that limits how much the interest rate can increase, either per adjustment period or over the life of the loan.
- Protects borrowers from excessive rate increases.
- Can be periodic (per adjustment) or lifetime (overall limit).
- Common feature in ARMs.
Memory trick: Caps keep your rates from jumping to the sky.