Learn how periodic caps protect borrowers by limiting interest rate increases during adjustment periods in ARMs, ensuring predictability.
A "periodic cap" is a protective feature of adjustable-rate mortgages (ARMs) that limits the amount the interest rate can change during a specific adjustment period. Unlike a lifetime cap, which sets the maximum interest rate increase over the life of the loan, a periodic cap focuses on the rate changes from one adjustment period to the next, such as annually or monthly.
Understanding the specifics of periodic caps is crucial for borrowers considering an adjustable-rate mortgage, as they directly affect the loan's affordability and the borrower's financial stability over time.
A periodic cap limits interest rate changes from one adjustment period to the next. In contrast, a lifetime cap increases the maximum interest rate over the loan's life.
If the index rate falls, the interest rate on an ARM can decrease, subject to any floor limits or minimum interest rate provisions specified in the loan agreement.
Your loan agreement should detail the existence and specifics of periodic caps. If unsure, contact your lender to clarify how your ARM's interest rate adjustments are structured and capped.
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