Adjustable-Rate Mortgages: How Interest Rate Cap Structures Work

An adjustable-rate mortgage (ARM) is a home loan with an interest rate that fluctuates – and a rate change can raise or lower the amount of the monthly payments.

Is an ARM right for you? Many Utah homebuyers opt for this form of financing, as lenders typically charge higher initial interest rates for fixed-rate mortgages. Early on, a home loan with an adjustable rate is easier on the wallet than a fixed-rate loan for the same amount – and if interest rates remain stable or go down, an ARM can even be less costly in the long run.

That being said, no single financing solution meets the needs of every Utah homebuyer. Below, the Intercap Lending team shares information that can help you decide if an ARM is worthy of your consideration

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When Does the Interest Rate Rise?

Adjustable-rate mortgages come with specific schedules that detail when the interest rate can change. During the initial period, the rate – and, therefore, the monthly payment amount – stays the same. After that, both can rise or fall.

As an example, a 7/1 ARM has a fixed rate for the first 7 years. Once that period has passed, the interest rate can adjust once per year for the life of the home loan.

Types of Interest Caps Associated with ARMs

ARMs may feature a few types of caps that limit the amount by which the interest rate can rise:

  • Initial adjustment cap – a limit to how much the rate can increase when the fixed-rate period ends
  • Periodic adjustment cap – a limit to how much the rate can go up with each subsequent adjustment
  • Lifetime adjustment cap – a limit to the total the rate can climb throughout the entire loan term

The rate caps are presented as a series of numbers, each of which corresponds to one of the above. For instance, an ARM with a 2/1/5 cap structure has a rate that can rise by a maximum of 2 percentage points with the first adjustment, then by only 1 percentage points with each subsequent adjustment. And over the life of the mortgage, the interest rate can increase by no more than 5 percentage points.

Is an Adjustable-Rate Mortgage Right for You?

To determine if an ARM might be your best path to becoming a Utah homeowner, as yourself these two questions:

  • Can you afford higher loan payments if the interest rate rises? A mortgage broker can help you calculate the maximum you could ever have to pay each month.
  • Do you plan to make this your lifelong home, or will you be selling at some point? If it’s the latter, interest rate fluctuations may not pose much of a problem.

When it comes to home loans, you have several options – and the professional mortgage brokers at Intercap Lending can help you find the right form of financing for your Utah dream home. For expert advice and assistance weighing the pros and cons of adjustable-rate home mortgages in Utah, contact us today.