Cap Categories That Affect an Adjustable Rate Mortgage

Direct Finance

Fixed and adjustable rate home loans are the primary mortgage types on the market. The interest charged for fixed rate loan remains unchanged over its lifetime while that for the adjustable rate mortgage is adjusted periodically. Most homebuyers, however, shun this since they assume they will have to cope with interest rates that are too high in the future.

You can rest assured that your mortgage company in Tempe will not take advantage of you by charging exorbitant fees. This is because there are now different caps that will control the interest rate you’re charged for your loan. Here are these caps:

Initial Adjustment Cap

There’s an initial period ranging from one to 60 months during which you’ll have a fixed interest rate. An initial adjustment cap will control the rate at which your interest will increase after this fixed period expires. The usual initial adjustment cap rate is 2% to 5%, which means the home loan’s interest won’t exceed 5% of what was charged during the fixed rate period.

Subsequent Adjustment Cap

After your first interest rate adjustment, there’s a cap on how much the rate will increase in subsequent periods. This cap, called the subsequent adjustment cap, typically is 2% at most.

Lifetime Adjustment Cap

This cap will limit the cumulative percentage of your mortgage’s interest over the loan’s term. In most jurisdictions, the lifetime adjustment cap is 5%. This way, your loan’s interest won’t surpass 5% of the rate that your lender initially gives you.

The precise percentage of the above caps differs on an ARM differs based on the lender. These caps give you a better picture of your loan’s total cost compared to the fixed rate charged initially. You can get an ARM rest assured it wouldn’t prove a costly mistake in the future.