Understanding Life Caps: Securing Your Home Loan’s Stability§
A life cap refers to the maximum percentage points that an interest rate can increase throughout the term of a home loan. For instance, if an adjustable-rate mortgage (ARM) starts at an interest rate of 4% and includes a life cap of 6%, the highest interest rate that can ever be applied over the lifetime of the loan is 10%.
How Life Caps Protect You§
Borrowers with ARMs that have reasonable life caps stand to save money in the long run. This is because life caps restrict the interest rate from soaring, regardless of how high current market rates may go. For example, even if fixed interest rates skyrocket to 25% in the future, the maximum applicable rate on the aforementioned loan would still be 10%.
Why Fixed-Rate Mortgages Don’t Include Life Caps§
The concept of life caps is exclusive to adjustable-rate mortgages. Unlike ARMs, fixed-rate mortgages have a constant interest rate that remains the same throughout the loan’s duration, negating the need for a cap on interest rate escalation.
By understanding the mechanism and benefits of life caps, you can better navigate your mortgage options to ensure your home loan remains manageable and your financial future secure.
Related Terms: adjustable-rate mortgage, fixed-rate mortgage, interest cap, mortgage interest rate.
