With an adjustable-rate mortgage (ARM), what are rate caps and how do they work?

Adjustable-rate mortgages (ARMs) typically include several kinds of caps that control how your interest rate can adjust.

There are three kinds of caps:

  1. Initial adjustment cap. This cap says how much the interest rate can increase the first time it adjusts after the fixed-rate period expires. It’s common for this cap to be either two or five percent – meaning that at the first rate change, the new rate can’t be more than two (or five) percentage points higher than the initial rate during the fixed-rate period.

  2. Subsequent adjustment cap. This cap says how much the interest rate can increase in the adjustment periods that follow. This cap is most commonly two percent, meaning that the new rate can’t be more than two percentage points higher than the previous rate.

  3. Lifetime adjustment cap. This cap says how much the interest rate can increase in total, over the life of the loan. This cap is most commonly five percent, meaning that the rate can never be five percentage points higher than the initial rate. However, some lenders may have a higher cap.
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