Posted on: 15th Dec, 2009 09:47 am
Please explain what the Caps mean. I am interested in a 3-year ARM and the LO told me the caps were 3/2/6? What do these caps mean in a clear explanation that I can understand?
Hi annyb,
If you are going for a 3 year ARM, it means for the first 3 years the interest rate on your loan will remain fixed. But from the 4th year, the rate will adjust. A rate cap sets a limit by which the interest rate on the loan adjusts at regular intervals. 2/6 here means that your loan will adjust every year by not more than 2% and will not exceed 6% throughout the lifetime of the loan.
If you are going for a 3 year ARM, it means for the first 3 years the interest rate on your loan will remain fixed. But from the 4th year, the rate will adjust. A rate cap sets a limit by which the interest rate on the loan adjusts at regular intervals. 2/6 here means that your loan will adjust every year by not more than 2% and will not exceed 6% throughout the lifetime of the loan.
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What this means is that your loan would be a 30 year loan. The payments will be based on repayment over the next thirty years.