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Rate Cap

Rate Cap sets the limit on how much the rate can change/adjust in an Adjustable-rate mortgage (ARM).

There are three kinds of rate caps:

  1. Initial adjustment cap: how much the interest rate can increase the first time it adjusts after the fixed-rate period expires. It’s typically 2% or 5% – meaning that at the first rate change, the new rate can’t be more than 2% (or 5%) 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 typically 2%: i.e. the new rate can’t be more than 2% 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 typically 5%, i.e. the rate can never be 5% points higher than the initial rate. However, some lenders may have a higher cap.

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