Knowledge Focus: Interest Rate Caps
Interest Rate Caps
An Interest Rate Cap provides the borrower with the protection against increases in interest rate levels. In this respect the cap is like an insurance against high interest rates. It provides a safeguards that limits the interest rate on adjustable rate mortgage loans, which can change in an adjustment interval and over the life of the loan. For example, if your annual per-period cap is 1% and your current rate is 6.5%, then your newly adjusted rate must fall between 5.5% and 7.5% regardless of actual changes in the index. Also called an interest rate ceiling.
