In an adjustable-rate mortgage with caps of 5/1/6, what does the "6" represent?

In an adjustable-rate mortgage with caps of 5/1/6, the "6" specifically refers to the overall cap on how much the interest rate can increase over the life of the loan. This type of cap structure is typically interpreted as follows: the first number indicates the maximum increase at the first adjustment (which is 5% in this case), the second number indicates the adjustment period (1 year in this scenario), and the final number specifies the maximum increase allowed over the entire term of the loan, which is 6%.

The correct answer emphasizes that at the first adjustment, the interest rate may not increase more than 5% over the initial rate, indicating that there is an initial limit on how much the lender can raise the interest rate after the first 5-year fixed period. This helps borrowers understand their financial exposure to interest rate changes over the life of the loan, providing critical information that impacts their budgeting and financial planning.

The distinction is important because it illustrates the mechanisms of adjustable-rate mortgages—how they can potentially vary, and under what limits, ensuring that borrowers are not subjected to unlimited increases. Understanding the implications of these caps allows borrowers to make more informed decisions regarding their mortgage options.