What is an adjustment cap?

An adjustment cap is a built-in protection within an Adjustable-Rate Mortgage that limits how much the interest rate can rise or fall at any single adjustment period. This prevents your monthly payment from changing dramatically all at once. Caps are typically expressed as a percentage — for example, a 2% adjustment cap means your rate cannot move more than 2 percentage points up or down when it resets, regardless of what the underlying index does.

Adjustment caps are an important safeguard to understand and compare when shopping for ARM products. Most ARMs actually have two separate caps: a periodic adjustment cap (limiting each individual change) and a lifetime cap (limiting how far the rate can move over the entire loan). Buyers in the Western Catskills financing rural or vacation properties should pay particular attention to these caps, as rate increases could significantly affect affordability — especially for properties with seasonal income potential that the buyer is counting on to help cover costs.