Cap
Definition and meaning of Cap in real estate.
A cap is a limit on how much the interest rate or monthly payment can adjust on an adjustable-rate mortgage (ARM). This limit protects borrowers from extreme payment increases when market rates rise.
In more detail
These limits are written into the loan agreement and specify the maximum amount the rate can increase during a single adjustment period and over the life of the loan. Most adjustable-rate mortgages feature a cap structure that limits the initial adjustment, subsequent periodic adjustments, and the lifetime maximum rate.
Buyers should carefully review these limits to understand their worst-case monthly payment scenario. Lenders use these caps to balance risk between themselves and the borrower, providing a safety net for home buyers.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Common Types | Initial, periodic, and lifetime limits |
| Primary Purpose | Protects borrowers from drastic payment increases |
| Applies to | Adjustable-rate mortgages |
A home buyer secures a 5/1 ARM with a lifetime cap of five percent. If the initial interest rate is four percent, the rate can never exceed nine percent over the duration of the loan, regardless of how high market interest rates climb.
Frequently asked questions
What is a lifetime interest rate cap?
A lifetime interest rate cap is the maximum interest rate that can be charged on an adjustable-rate mortgage over the entire life of the loan, regardless of market conditions.
Does a cap also limit how much my rate can decrease?
Yes, many adjustable-rate mortgages have floor limits that prevent the interest rate from dropping below a specified minimum level.
Related terms
Sources & references
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