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. 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 rejoice at all the money they save. However, the downside to an ARM is that when interest rates rise, so do your monthly mortgage payments. That can really hurt, of course. However, people who have an ARM can take heart with the fact that there are interest rate caps in place that prevent your interest rate from going as high as it wants.
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 then the interest you pay on your mortgage loan is limited in how much it can go up from one adjustment period to the next. Let's say that you have an ARM, and interest rates rise dramatically. You could be looking at much, much higher monthly payments if the interest rate you pay rises along with the interest rate as indicated by the indexes to which your adjustable rate mortgage 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 which the interest rate can rise over the time-frame of the loan whatever it 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. He or she will walk you through all your many choices, and explain to you such things as interest rate caps, periodic adjustment caps, and lifetime adjustment caps.
