Annual cap,
Definition of Annual cap:
The annual cap is a clause in the contract of an adjustable-rate mortgage (ARM), limiting the possible increase in the loan's interest rate during each year. The cap, or limit, is usually defined in terms of rate, but the dollar amount of the principal and interest payment may be capped as well. Annual caps are designed to protect borrowers against a sudden and excessive increase in the amount of their monthly payments when rates rise sharply over a short period of time. With an ARM, the initial interest rate is fixed for a period of time, after which it resets periodically based on current interest rates. ARMs also typically have lifetime rate caps that set limits on how much the interest can increase over the life of the loan.
Ceiling imposed on the increase in a charge, fee, or quantity (such as interest rates or rent) during a specified period.
The annual interest rate of an adjustable-rate mortgage loan with an annual cap will only increase as much as the terms allow in percentage points, regardless of how much rates may actually rise during the initial period. For example, a 5% ARM that is fixed for three years with a 2% cap can only adjust to 7% in the fourth year, even if rates increase by 4% over the initial fixed term of the loan. A loan with a dollar cap can only increase by so much as well, although this type of cap can lead to negative amortization in some cases.
Meaning of Annual cap & Annual cap Definition
