Adjustable Rate Mortgage Interest Rate Caps

The adjustable rate mortgage, more commonly referred to as an ARM, is one of the most popular kinds of mortgages available in the United States. That’s because the initial interest rate is much lower than most other home loans for a set period of time. After this initial discount during the introductory period, the rate resets, or adjusts. Home buyers who take out an ARM get the benefit of lowered monthly payments when index rates fall.

When that happens, borrowers of adjustable rate mortgages could potentially save money on their monthly payments. However, the downside to an ARM is that when interest rates rise, so do the monthly mortgage payments. Luckily, people who have an ARM loan are protected by mortgage interest rate caps that limit how high the interest rate can go once the introductory fixed rate period is over.

Types of ARM Interest Rate Caps

There are two kinds of interest rate caps on an adjustable rate mortgage: Periodic adjustment caps and lifetime adjustment caps.

If your adjustable rate mortgage has a periodic adjustment cap, the interest you pay on your mortgage loan is limited in how much it can go up from one adjustment period to the next.

For example, if you have an ARM set with an initial interest rate, your monthly payment could be affected when that rate changes. If the ARM rate were to change dramatically, you could be looking at much higher monthly payments if the interest rate you pay rises along with the interest rate as indicated by the index rates to which your ARM loan is linked. With a periodic adjustment cap in place, however, the interest rate rise can only go so high, as determined by the cap.

A lifetime adjustment cap is the limit to which the interest rate can rise over the entire life of the loan, whatever the term might be. Additionally, all ARMs have a total, overall ceiling or cap on interest rates.

Before you take out an adjustable rate mortgage, be sure to go over all your loan options with a lending professional. It’s important to discuss question and concerns, as well as review your other mortgage options, before committing to a home loan.