QandAs: Loans

What is a Lifetime Cap?

Answer:
There are numerous mortgage loan options available

to home buyers. With home prices steadily increasing, a few buyers look for home loans that offer low initial payments. Hence, some buyers consider adjustable rate mortgages.

This type of mortgage loan involves a low fixed rate for the first three, five, or seven years. After the initial rate period, the interest rate adjusts annually. Annual adjustments can rise or fall depending on the current market. There is no way to predict rate adjustments. Thus, adjustable rate mortgages are dangerous due to the risk of severe payment shock.

Fortunately, the majority of adjustable rate mortgages have a lifetime cap. This cap limits how high the mortgage rate can rise over the life of the loan. For this reason, a few borrowers are willing to accept an adjustable mortgage loan.

During the mortgage loan process, many home loan lenders provide borrowers with a “worst-case scenario.” This particular document reveals the mortgage payment amount at the maximum interest rate. Borrowers ought to seriously consider whether they can meet this expense.

Lifetime caps are intended to protect borrowers from rising mortgage rates, which can greatly impact their ability to pay their current mortgage payment in the future.


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