Interest Rate Cap Structure

AAA

DEFINITION of 'Interest Rate Cap Structure'

Limits to the interest rate on an adjustable-rate loan - frequently associated with a mortgage. There are several different types of interest rate cap structures including an initial, periodic and lifetime interest rate cap structure. The initial cap is a value that limits by what amount the interest can adjust at the mortgage's first interest rate adjustment date. The period cap is a value that limits by what amount the interest rate can adjust at each subsequent adjustment date. The lifetime cap limits the total amount by which the interest rate can adjust over the life of the mortgage.

INVESTOPEDIA EXPLAINS 'Interest Rate Cap Structure'

The interest rate cap structure of a mortgage gives holders protection from large interest rate increases. For example, 5-1 fixed period ARMs usually offer the borrower a choice between a 2-2-6 or a 5-2-5 interest rate cap structure. (The first number refers to the initial cap, the second number to the periodic cap, and the third number to the lifetime cap.) If the fully indexed interest rate on the mortgage were to increase substantially before the first interest rate adjustment date, but stay below a 5% lifetime cap value, the borrower would be better off choosing the 2-2-6 interest rate cap structure. However, the dilemma to this is that borrowers can never truly be certain where interest rates will head next.

RELATED TERMS
  1. Two-Step Mortgage

    A mortgage that offers an initial fixed-interest rate for a period ...
  2. ARM Index

    The benchmark interest rate to which an adjustable rate mortgage ...
  3. Discretionary ARM

    An adjustable-rate mortgage on which the lender has the right ...
  4. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
  5. Interest Rate Risk

    The risk that an investment's value will change due to a change ...
  6. Lifetime Cap

    The maximum interest rate on an adjustable-rate mortgage (ARM) ...
Related Articles
  1. Savings

    Are Equity-Indexed Annuities Right For ...

  2. Credit & Loans

    4 Steps To Attaining A Mortgage

  3. Insurance

    ARMed And Dangerous

  4. Credit & Loans

    How Mortgage Refinancing Affects Your ...

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center