A Periodic Cap in an ARM limits what aspect of the loan?

A Periodic Cap in an Adjustable Rate Mortgage (ARM) specifically governs the amount by which the interest rate can increase or decrease during each adjustment period. This is crucial in providing borrowers with a degree of financial predictability and protection against dramatic shifts in interest rates.

Essentially, the periodic cap sets a ceiling on how much the interest rate can rise or fall at each specified adjustment point, which can be annually or semi-annually, depending on the terms of the loan. For instance, if an ARM has a periodic cap of 2%, and the current rate is at 4%, the rate could only increase to a maximum of 6% at the next adjustment.

This form of limitation is vital for borrowers because it helps them plan for future payments, ensuring that adjustments won’t exceed a manageable range within the specified intervals. Other aspects, such as the overall loan amount, payment due dates, and length of the term, are influenced by different features of the mortgage agreement, rather than the periodic cap.