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What are caps on an ARM?

If you have an adjustable rate mortgage (ARM), or are considering one you have probably heard the term "caps" mentioned. The caps control how much your interest rate can change at each rate adjustment. The different types of caps are:
  • Initial Cap
  • Interim Cap
  • Lifetime Cap

Initial Caps are the limits placed on the first interest rate adjustment. On the mortgage agreement you signed at settlement, there is a paragraph that states the interest rate at the first adjustment date would not be greater and lower than a certain range.

Interim Caps are limits on how much your rate can go up each time it adjusts. For example your rate couldn't go up more than 1% each time after the initial adjustment.

Lifetime Caps are limits on home much your rate can go up over the life of the loan. This gives you an idea of your "worst case scenario".


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