What are rate caps on an adjustable-rate mortgage?
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Short answer
Rate caps limit how much an interest rate can move up or down. ARMs typically have an initial adjustment cap, a subsequent adjustment cap, and a lifetime cap. The exact limits are loan-specific and appear on the Loan Estimate or Truth-in-Lending disclosure.
Full explanation
Rate caps control how far an adjustable-rate mortgage interest rate can rise or fall when it adjusts.
The CFPB describes three common kinds. An initial adjustment cap limits the first change after the fixed-rate period ends. That first-change limit is commonly two or five percentage points above or below the initial rate, but the loan can differ. A subsequent adjustment cap limits later changes, most commonly by one or two percentage points from the previous rate. A lifetime adjustment cap limits the total change over the life of the loan, most commonly five percentage points from the initial rate. Some loans use a higher lifetime cap, and the floor for decreases can differ from the cap on increases.
Two lenders can quote the same starting rate and still offer different caps. Even if you expect to move or refinance before the adjustable period, it is useful to know the highest payment the loan could reach. Ask the lender to calculate that payment, and check the Loan Estimate or Truth-in-Lending disclosure for the loan you are considering.
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What are rate caps with an adjustable-rate mortgage (ARM), and how do they work?
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