What does the Initial Cap in an ARM signify?

The Initial Cap in an Adjustable-Rate Mortgage (ARM) specifically refers to the limit on how much the interest rate can increase during the first adjustment period following the initial fixed-rate period. This cap is designed to provide borrowers with some protection against sudden and large increases in their mortgage payments. For example, if an ARM has an initial cap of 2%, this means that after the initial fixed period is over, the interest rate can only increase by up to 2% at the first adjustment, regardless of market conditions.

This feature is important for borrowers to understand, as it can influence their monthly payment amounts and overall affordability. It is crucial in managing the risks associated with ARMs, which can have highly variable payments over time. Understanding the Initial Cap allows borrowers to better prepare for potential changes in their mortgage payments as their loan adjusts.