Initial Interest Rate Cap

DEFINITION of 'Initial Interest Rate Cap'

The maximum amount the interest rate on an adjustable-rate loan can adjust on its first scheduled adjustment date. This is part of the interest rate cap structure on the loan, usually a mortgage, which helps to give borrowers some protection from payment shock but does limit the benefit from interest rate reductions.

BREAKING DOWN 'Initial Interest Rate Cap'

For example, an adjustable rate mortgage with a starting interest of 6% and an initial interest rate cap of 2% could adjust upward no higher than 8%, or no lower than 4% at its first adjustment date. The rate change will be limited by the cap even if the interest rate enviroment changes dramatically in either direction. Loans which have initial interest rate caps also frequently have periodic and lifetime interest rate caps, which limit the amount the interest rate can adjust throughout the life of the loan.

RELATED TERMS
  1. Periodic Interest Rate Cap

    A part of an interest rate cap structure on loans and mortgages. ...
  2. Interest Rate Cap Structure

    Limits to the interest rate on an adjustable-rate loan - frequently ...
  3. Interest Rate Ceiling

    The maximum interest rate that a financial institution can charge ...
  4. Life Cap

    The maximum amount that the interest rate on an adjustable rate ...
  5. Annual Cap

    A clause found in the contract of an adjustable-rate mortgage ...
  6. Lifetime Cap

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

    Mortgage Financing

    Mortgage Financing
  2. Credit & Loans

    Adjustable Rate Mortgage: What Happens When Interest Rates Go Up

    Adjustable rate mortgages can save borrowers money, but they can't go into it blind. In order to benefit from an ARM, you have to understand how it works.
  3. Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  4. Home & Auto

    Mortgages: Fixed Rate Versus Adjustable Rate

    Choosing the right mortgage can help homebuyers avoid costly mistakes. Learn the difference between fixed- and adjustable-rate loans.
  5. Credit & Loans

    How Interest Rates Work On A Mortgage

    A step-by-step explanation of the interest calculations, mortgage types, and how the loan is eventually "retired" – which means paid off.
  6. Credit & Loans

    All Your Questions About Loan Interest Rates

    If you think interest rates don’t really matter -- think again. Interest rates have a huge impact on your finances.
  7. Credit & Loans

    Mortgage Basics: Variable-Rate Mortgages

    By Lisa SmithA variable-rate mortgage, also commonly referred to as an adjustable-rate mortgage or a floating-rate mortgage, is a loan in which the rate of interest is subject to change. When ...
  8. Credit & Loans

    The Best Candidate For an Adjustable Rate Mortgage

    Adjustable-rate mortgages aren't for everyone, but they make sense if you are a short-term homeowner or can pay off the loan before it readjusts.
  9. Personal Finance

    Simple Interest Loans: Do They Exist?

    Yes, they do. Here is what they are – and how to use them to your advantage.
  10. Home & Auto

    Homebuyers' Walkthrough: Which Type Of Mortgage Is Best?

    Most homebuyers will need to secure a mortgage to finance their home. The lending climate has changed following the late 2000s financial crisis, and it may be more difficult to get approved for ...
RELATED FAQS
  1. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  2. What is the difference between a fixed annual percentage rate (APR) and a variable ...

    Fixed ARP and variable APR loans operate differently but serve the same purpose: to collect interest from a borrower so the ... Read Answer >>
  3. What is the difference between real and nominal interest rates?

    Learn what nominal interest rates and real interest rates are, how real interest rate takes into account the inflation rate, ... Read Answer >>
  4. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
  5. How can an investor reduce interest rate risk?

    Learn about the different ways investors can reduce interest rate risk. Locking in interest rates increases certainty for ... Read Answer >>
  6. What are the pros and cons of a simple-interest mortgage?

    Learn the difference between a simple interest mortgage and a standard mortgage, along with their relative advantages and ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center