An Overview of Adjustable-Rate Mortgage Rate Caps

An adjustable-rate mortgage is a type of loan whose interest rate is based on an index, typically the fed funds rate, one-year Treasury bill or the Libor rate. Every lender has to decide the number of points they add to the index rate.

To entice borrowers, they start with a teaser rate that is then reset higher after the borrower makes the first payment. Since a mortgage lender in Oregon can readjust the interest rate, what is to protect the interests of the borrower?

Typically, there are three kinds of rate caps. You should expect that your lenders’ falls within one of these three categories:

1. Initial adjustment cap

In this case, the borrower knows the extent to which the interest rate can go up the first time after the fixed-rate period is over. The most common adjustments for this cap is 2–5%. This means that the new rate after a change cannot be two or five percentage points more than the initial rate.

2. Subsequent adjustment cap

This cap regulates how much a lender can adjust the rates in the periods that follow the first adjustment. It is most commonly a two percent increase. That is to say; the new rate must always fall within two percentage points higher than the previous one.

3. Lifetime adjustment cap

In this case, the cap regulates how much an interest rate can increase within the lifetime of the loan. More often than not, the cap is 5%. That way, the maximum rate the adjustment can get to is 5 percentage points higher than the initial rate.

Adjustable rate mortgages are advantageous because they have lower rates than fixed rate mortgages. What’s more, the rates are tied to a treasury note which means that a borrower can buy a house for less.

This is especially attractive for people with moderate incomes or first-time home buyers. Only be sure to count your costs before you hitch your wagon.