Initial Interest Rate Cap

AAA

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.

INVESTOPEDIA EXPLAINS '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. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
  2. Lifetime Cap

    The maximum interest rate on an adjustable-rate mortgage (ARM) ...
  3. Payment Shock

    The risk that a loan's scheduled future periodic payments may ...
  4. Interest Rate Cap Structure

    Limits to the interest rate on an adjustable-rate loan - frequently ...
  5. Life Cap

    The maximum amount that the interest rate on an adjustable rate ...
  6. Total Annual Loan Cost (TALC)

    The projected total cost that a reverse mortgage holder should ...
Related Articles
  1. Credit & Loans

    4 Steps To Attaining A Mortgage

  2. Insurance

    ARMed And Dangerous

  3. Credit & Loans

    How Mortgage Refinancing Affects Your ...

  4. Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

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