Life Cap

AAA

DEFINITION of 'Life Cap'

The maximum amount that the interest rate on an adjustable rate loan can increase over the term of the loan.

A life cap can be expressed as an absolute interest rate - such as a maximum lifetime rate of 12%, which is called an interest rate ceiling - or as a maximum percentage change in the interest rate from the initial interest rate on the loan. When the life cap is expressed as a maximum percentage change from the initial interest rate, it can also apply to interest rate decreases.

INVESTOPEDIA EXPLAINS 'Life Cap'

The life cap on a loan is used frequently as part of an interest rate cap structure. For example, a fixed period or hybrid ARM frequently has initial, periodic and life caps. On a 5-1 hybrid ARM, this might be expressed as a 5-2-5 cap structure, meaning there is a 5% initial cap, 2% periodic cap and 5% life cap. This means that at the first interest rate change date, the rate could change by a maximum of 5%, and at each subsequent change date the rate could change by a maximum of 2%. The maximum lifetime change in this example is 5%.

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Fixed-Period ARM

    An adjustable-rate mortgage (ARM) with an initial fixed-interest-rate ...
  3. Hybrid ARM

    A hybrid adjustable-rate mortgage blends the characteristics ...
  4. Initial Interest Rate Cap

    The maximum amount the interest rate on an adjustable-rate loan ...
  5. Interest Rate Ceiling

    The maximum interest rate that a financial institution can charge ...
  6. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
Related Articles
  1. Insurance

    ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  2. Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  3. Economics

    How Interest Rates Affect The Housing Market

    Understand how rate changes can affect home prices, and learn how you can keep up.
  4. Options & Futures

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  5. Credit & Loans

    Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  6. Credit & Loans

    What is the debt ratio for an FHA loan?

    Borrowing through the Federal Housing Administration requires individuals to provide proof of income as well as information relating to total outstanding debt.
  7. Economics

    What's the Federal Funds Rate?

    The federal funds rate is the interest rate banks charge each other for overnight loans to meet their reserve requirements.
  8. Trading Strategies

    American Express: Headwinds and Tailwinds

    Any investors considering a position in American Express need to know these important facts.
  9. Investing

    What's a Bank Guarantee?

    Bank guarantees are used to assure a third party of payment or performance of an obligation. The obligation can be either to pay an amount due or to perform on a contract. By granting the guarantee, ...
  10. Trading Strategies

    How do I use the debt ratio to decide when to invest in a company?

    Understand the calculation and interpretation of the debt ratio and how this metric is used by investors to analyze a company's financial health.

You May Also Like

Hot Definitions
  1. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  2. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  3. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  4. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  5. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  6. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
Trading Center