Quick answer
Rate caps limit how much the interest rate on an adjustable-rate mortgage can change: the initial cap at the first adjustment, the subsequent (periodic) cap at each later adjustment, and the lifetime cap over the whole loan, measured from the starting rate.
Key facts
Reading cap numbers
Caps are written first/periodic/lifetime. Fannie Mae’s 5/6 ARM uses 2/1/5: up to 2 percentage points at the first reset, 1 at each six-month reset after that, and never more than 5 above the starting rate. On 7/6 and 10/6 ARMs the caps are 5/1/5, so the first reset alone can reach the lifetime ceiling.
Worst case on a 5/6 ARM
| From | Rate | Monthly payment |
|---|---|---|
| Month 1 | 6.5% | $1,896 |
| Month 61 | 8.5% | $2,261 |
| Month 67 | 9.5% | $2,451 |
| Month 73 | 10.5% | $2,645 |
| Month 79 | 11.5% | $2,842 |
Caps limit decreases as well as increases. Some ARMs cap the payment rather than the rate, which can let unpaid interest add to the balance; a Qualified Mortgage can’t do that.
Related terms
- Adjustable-rate mortgage
- Index and margin, which set the rate the caps limit
- Fixed vs adjustable-rate mortgages
Sources
- Fannie Mae Standard ARM Plan Matrix — Rate caps on a Fannie Mae 5/6 ARM (first/periodic/lifetime); Rate caps on Fannie Mae 7/6 and 10/6 ARMs (first/periodic/lifetime) (Oct 1, 2021)
- CFPB: What are rate caps with an adjustable-rate mortgage (ARM), and how do they work?
Last reviewed Figures are checked against the sources above. Read our editorial policy. This page is general information, not financial advice — see the disclaimer.