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.

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