Annual Cap

Dictionary Says

Definition of 'Annual Cap'

A clause found in the contract of an adjustable-rate mortgage (ARM) that limits the possible increase in the loan's interest rate to a certain amount each year. The cap is usually defined in terms of rate, but the dollar amount of the principal and interest payment can be capped as well. Annual caps are designed to protect borrowers against a sudden and excessive increase in the amount of their monthly payments when rates rise sharply over a short period of time.
Investopedia Says

Investopedia explains 'Annual Cap'

A loan with an annual rate cap will only increase by so much in terms of percentage points regardless of how much rates actually rise. A 5% ARM with a 2% cap can only adjust to 7%, even if rates increase by 4% over the initial fixed term of the loan. A loan with a dollar cap can only increase by so much as well, although this type of cap can lead to negative amortization in some cases.

Sign Up For Term of the Day!

Try Our Stock Simulator!

Test your trading skills!

Related Definitions

  1. Cap

    The highest ...
  2. Insurance

    A contract ...
  3. Annuity

    A financial ...
  4. Payment Shock

    The risk that a ...
  5. Adjustable-Rate Mortgage - ARM

    A type of ...
  6. Lifetime Cap

    The maximum ...
  7. Delinquent

    The failure to ...
  8. Interest Rate Ceiling

    The maximum ...
  9. Fixed Interest Rate

    An interest rate ...
  10. Hybrid ARM

    A hybrid ...

Articles Of Interest

  1. Subprime Is Often Subpar

    Proceed with caution when considering these short-term, high-interest mortgages.
  2. Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  3. ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  4. This ARM Has Teeth

    Find out how to avoid getting bitten when your mortgage rate resets.
  5. Common Liabilities That Hurt Your Net Worth

    Every penny that you keep out of the liability side of the net worth equation essentially ends up on the asset side.
  6. Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  7. How Lender Overlays Prevent Mortgages

    Loan applications are increasingly being rejected because of lender overlays.
  8. Protect Your Personal Assets

    A family limited partnership (FLP) can go a long way toward securing your family's property.
  9. What You Should Know About Home Appraisals

    Home appraisals are an unbiased way to determine a home's value. Here is what you need to know about obtaining one.
  10. A Tax Primer For Homeowners

    Go beyond interest and find out how mortgage points affect your taxable income.

comments powered by Disqus
Recommended
Loading, please wait...
Trading Center