Helps homeowners save money by adjusting to a lower interest rate. Great for people who plan to move, relocate, or expecting an increase in income.
An adjustable rate mortgage (ARM) is a mortgage in which the interest rate may change over time. With an adjustable-rate mortgage, the interest rate may change periodically, usually in relation to an index (such as the Secured Overnight Finance Rate), and payments may “adjust” up or down accordingly. Unlike a fixed rate mortgage, homeowners with this type of home loan aren’t guaranteed the same interest rate for the duration of their loan. The risk of an increasing interest rate is something that borrowers should take into account when considering an adjustable rate mortgage for their home financing.
Depending on the type of mortgage selected, interest rate caps offer some protection for homeowners who opt to finance their home with an adjustable rate mortgage. An interest rate cap sets a limit on the amount the interest rate can increase. There are two types of interest rate caps. A periodic adjustment cap limits the amount an interest rate can increase or decrease between two adjustment periods after the first adjustment. A lifetime cap limits the amount the interest rate can increase over the duration of the loan.
Payment caps follow a similar structure as interest rate caps. Payment caps limit the amount the monthly payment may increase from one adjustment period to another, instead of the amount the interest rate can increase.