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Cap

Cap controls how the interest rates in adjustable-rate mortgages (ARMs) can adjust. There are three kinds of caps:

  1. Initial adjustment cap: how much the interest rate can increase the first time it adjusts after the fixed-rate period expires;
  2. Subsequent adjustment cap: how much the interest rate can increase in the adjustment periods that follow; and
  3. Lifetime adjustment cap: how much the interest rate can increase in total, over the life of the loan. This cap is typically five percent, meaning that the rate can never be five percentage points higher than the initial rate. However, lenders may have a higher cap.

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