Life Cap

In the context of adjustable-rate mortgages, the life cap is the maximum amount that an interest rate can change. With adjustable-rate mortgages, the interest rate of the loan can increase or decrease depending on the performance of a financial index. With most adjustable-rate mortgages, there is a maximum that the lender will charge regardless of how much the financial index increases in value.

This lifetime interest cap can be quoted in two ways. It could potentially be quoted as a maximum interest rate that can be charged for the loan. It can also be quoted as the difference between the original rate of interest and the new rate of interest. In some cases, there can also be a life cap that works in the opposite direction. The interest rate on your loan may decrease by a certain amount only if the financial index continues to decrease.

For a borrower, a life cap can be a very beneficial thing. With this information, you know what the worst case scenario is when it comes to paying interest on your mortgage. Regardless of how much the financial index increases, you know that you will not have to pay more than a certain amount.