Question:

What is payment adjustment cap for an ARM?

Answer:

The payment adjustment cap is a feature you may or may not have on a negatively amortizing mortgage loan. Without a payment adjustment cap your monthly payment may grow substantially and if you are not ready for an abrupt increase, your home mortgage may suffer.

Mortgage payment adjustment caps are typical to neg am (negam, deferred interest, option arm) loans.

The most commonly applied payment adjustment yearly cap is 7.5%, but there may be variations, or there may not be any. ARMs without the neg am feature have a rate adjustment cap, which a typical 1-2%, depending on the adjustment interval.

Also, the home loan payment adjustment cap is only one of the features that are very helpful to know about an Option Adjustable Rate Mortgage (ARM). Option ARMs right now are the most advertised and widely used home loans with negative amortization. Beside a negative amortization payment adjustment cap and what you typically have to know about an adjustable rate loan, this is what you should also know about any NegaAm mortgages (with minimum payment option):

  • The initial payment should be calculated for:
    • the initial interest rate.
    • the initial interest rate but interest only.
    • some fully indexed rate.
  • What is the initial payment period?
  • How big is the payment adjustment period after the initial period ends?
  • Is there negative amortization cap, and at what rate?
  • Is there payment recast period?
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