Interest rate caps refers to the maximum amount that a monthly payment can change during the adjustment period of an adjustable-rate mortgage. This protects the mortgage holder from large adjustments to their monthly payment. There are different types of interest rate caps including initial, periodic and lifetime. When offering an adjustable rate mortgage, lenders refer to a three-number formula like 2-2-6 or 5-2-5. Each number refers to initial, periodic and lifetime in sequence. Initial refers to the cap placed on the first rate adjustment in the adjustable rate mortgage. This usually happens after an initial period of stable interest rates. The periodic rate cap refers to the subsequent interest rate adjustments after the first one. The lifetime rate cap refers to the maximum that a rate can adjust throughout the life of the loan.
