What is an adjustable rate mortgage cap?

An adjustable rate mortgage cap (also known as an ARM cap) is a limit set on the amount that an adjustable rate mortgage can change over the course of its life. In Pennsylvania, the adjustable rate mortgage caps are set by the Pennsylvania Real Estate Commission and are determined by the loan type and the index the loan is associated with. Adjustable rate mortgage caps help protect borrowers from excessive changes in rates over time. A cap is the maximum limit that the interest rate of an adjustable rate mortgage can be adjusted to, either at any one point in time, or over the entire loan term. There are typically two types of caps: periodic caps and lifetime caps. Periodic caps are the maximum amount a lender can increase a loan’s interest rate each time it adjusts. For example, a loan might have a periodic cap of 2%, meaning the interest rate could only increase up to 2% each time it adjusts. Lifetime caps are the maximum interest rate the loan will ever reach. For example, a loan might have a lifetime cap of 5%, meaning the interest rate can never go above 5%, no matter how much the loan adjusts. The adjustable rate mortgage caps help protect borrowers from drastic rate changes over time, allowing them to borrow money with the confidence that their loan rates will remain relatively stable.

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What is an adjustable rate mortgage cap?

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