Periodic Interest Rate Cap

DEFINITION of 'Periodic Interest Rate Cap'

A part of an interest rate cap structure on loans and mortgages. The periodic interest rate cap limits the amount by which the interest rate on an adjustable rate loan can adjust at specified adjustment dates. For example, an adjustable rate mortgage with a starting interest of 6%, an initial interest rate cap of 2% and a periodic interest rate cap of 2% could adjust upward no higher than 10%, or no lower than 2% at its second adjustment date. (This example assumes that the mortgage adjusted by 2%, upward or downward as the case may be, at its first adjustment date.)

BREAKING DOWN 'Periodic Interest Rate Cap'

The periodic interest rate cap on a loan along with the frequency of the interest rate adjustment dates determines how quickly the interest rate on the loan can move upward or downward. Loans which have initial interest rate caps frequently have initial and lifetime interest rate caps as well which limit the amount by which the interest rate on the loan can adjust at the first scheduled adjustment date and over the lifetime of the loan. A loan's interest rate cap structure should not be ignored as it can very important over the life of the loan.

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