Periodic Rate Cap

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The periodic interest rate cap is the maximum amount the loan rate can change on an adjustable-rate mortgage loan on the anniversary date.

The periodic interest rate cap is the maximum amount the loan rate can change on an adjustable-rate mortgage loan on the anniversary date. This is the maximum amount the rate can change between adjustment periods on an adjustable rate loan. These usually range from 1% for adjustable with semi annual rate adjustments to 2% for adjustable with annual adjustments.

ARM loan rates are often reset once a year after an initial period. A lifetime cap often exists. ARMs with payment caps are "payment option loans". Payment option loans provide the borrower with various payment options to choose from. A lifetime cap limits the maximum loan rate that can be charged. ARMs that feature periodic interest rate caps don't have payment caps. When the interest rate rises, so does the amount of the monthly payment. The borrower is always required to make a monthly payment that will fully amortize (payoff) the loan (principal and interest) over the loan term. There is only one payment option: a fully amortizing payment.

There are protections built in for the borrower for both the short term (periodic cap) and the long term (life of the loan cap). For a one year treasury ARM the interest rate can adjust each 12th month beginning with month 13 and can continue up or down by the amount of the periodic cap. Each year the loan can fluctuate by 2 percentage points not to be confused with 2% of the loan or 2% of the interest rate. The maximum the loan can go up is the lifetime cap and is normally 6% over the start rate. Again, that is 6% added to the start rate and not 6% of the start rate, e.g. start rate is 4.5% plus 6% for a total of 10.5% maximum interest rate for the life of the loan. Some Arms will have started maximums and do not depend on the start rate plus a percentage.

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