Title:
Adjustable Rate
Mortgages – Talking About Interest Rate Caps
Word Count:
396
Summary:
Many people have
jumped on adjustable rate mortgages to take advantage of the historically low
interest rates we have seen over the last few years. Rates are now rising,
which means you need to understand caps.
Keywords:
adjustable rate
mortgages, arm, interest rate, caps, loan, lifetime caps, periodic caps
Article Body:
Many people have
jumped on adjustable rate mortgages to take advantage of the historically low
interest rates we have seen over the last few years. Rates are now rising,
which means you need to understand caps.
Adjustable Rate Mortgages – Talking About Interest Rate Caps
An adjustable rate mortgage is just what it sounds like. The interest rate can
be adjusted to match certain interest rate standards. The advantage of such a
loan is it can seriously lower monthly mortgage payments if interest rates are
low. Over the last few years, of course, rates have been incredibly low. Rates
are now rising and you need to understand what that means for your adjustable
rate mortgage.
Since the interest rate on your loan is adjustable, you should be getting a
little nervous about rising interest rates. That being said, most loans have
graduated step increases and caps that keep things from getting nightmarish too
quickly. Here is a closer look.
A good adjustable rate mortgage protects you from massive rate increases
through something known as rate caps. There are two types of rate caps. Each
has benefits and negatives.
A lifetime rate cap is just what it says. This cap sets the maximum interest
rate the lender can charge you for the loan. You must always demand a lifetime
cap on any mortgage you take out. Assume you take out an adjustable rate
mortgage with an interest rate of four percent. As part of the agreement, the
loan has a lifetime cap of eight percent. If interest rates shoot up to 10
percent, your loan will cap out at nine percent. While this is a high interest
rate, it is a lot better than paying 10 percent.
Periodic rate caps also protect you, but in a different way. A periodic rate
cap defined the maximum percentage your interest rate can increase over a
period of time. The shorter the time period, the better the cap. If your loan
document allows the lender to adjust the rate every six months, the cap may be
as low as one percent. This means the lender can only increase the interest
rate by a maximum of one percent, regardless of what the market is charging for
new loans.
Adjustable rate mortgages are great when interest rates are low. When rates
start creeping up, however, you need to take a close look at your caps.