Today is October 1, 2XX1. Justine has just bought a home in beautiful Rockford, IL. The selling price of home was $310,000. Justine made a down payment of 20% and borrowed the balance. She was able to negotiate a 2-year ARM with an initial teaser rate of 2.00% and subsequent annual rates equal to the current 90-day T-Bill rate on the loans anniversary date (October 1) plus 1.10%. The loan is for 30 years with annual and lifetime caps of 1 and 5, respectively. The floor is equal to the teaser rate.

The following information may prove helpful:

90-day T-Bill rates:

October 1, 2XX1 2.00%

October 1, 2XX2 2.20%

October 1, 2XX3 2.40%

October 1, 2XX4 2.50%

What is the maximum rate this loan could ever rise to?

1. 6%
2. 7%
3. 8%
4. 5%