DEFINITION of 'Lifetime Cap'
The maximum interest rate on an adjustable-rate mortgage (ARM) that may be charged at any point over the life of the mortgage. The lifetime cap is usually expressed as a percentage increase from an initial interest rate. For example, if a fixed period ARM has an initial fixed interest rate of 5% and a lifetime cap of 5%, the maximum interest rate that may be charged is 10%. Lifetime caps are usually part of a mortgage's interest rate cap structure which consists of initial, periodic and life caps.
BREAKING DOWN 'Lifetime Cap'
Since ARMs derive their interest rates from a benchmark index, such as the London Interbank Offered Rate (LIBOR), lifetime caps limit the risks of substancial interest rate increases over the life of the mortgage. Initial and periodic caps limit the amount by which an ARM's interest rate can increase at any single interest rate adjustment date.
Some mortgages have interest rate ceilings which are similar to, and sometimes referred to as, lifetime caps. However, an interest rate ceiling is usually expressed as an absolute percentage value. For example, the contractual terms of the mortgage may state that the maximum interest rate may never exceed 15%.