Question:

What are adjustable rate mortgage caps?

Answer:

The adjustable rate mortgage caps are limits applied over your ARM rate. ARMs have a lot of features to distinguish them from fixed rate mortgages and other ARMs.

Adjustable Rate Mortgage Features

  • ARM rate

    Adjustable rate mortgages rate is tied to one of many ARM indexes such as the 11th District Cost of Funds Index (COFI), or London Interbank Offering Rate Index (LIBOR). The ARM rate is based on the ARM index plus the lender's margin.

  • ARM adjustment frequency

    ARM rate changes as specified on the ARM agreement. Sometimes, the adjustable rate mortgage frequency is as often as a month, or as long as several years. Most commonly, ARM resets occur once or twice a year.

  • ARM caps

    Adjustable rate mortgages have caps. A cap is a limit on how much your mortgage payment and rate can increase or decrease within a single adjustment, or for the lifetime of the loan.

Adjustable Rate Mortgage Caps

  • Initial adjustment cap is the limit the rate can reach at the first reset date.
  • Periodic adjustment caps show the maximum change in the rate between two consecutive adjustments.
  • Lifetime cap is the maximum the rate can change within the lifetime of the loan.

Adjustable rate mortgage caps structure can be described in the format 1/2/7, where the first number is the initial adjustment cap, the second - the periodic cap, and the third is the lifetime cap of the loan. Other common ARM caps are 2/2/5 and 2/2/6.

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