Annual Cap
Barron's Banking Dictionary:
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Annual Cap
Clause in an Adjustable Rate Mortgage limiting any increase in the interest rate during a calendar year adjustment period to a preset amount or ceiling, giving the borrower a cushion against a sudden increase in mortgage payments and Payment Shock when the loan rate is adjusted, particularly in periods of rising interest rates. A 10% mortgage with a 2% annual cap will increase only to 12% even if the mortgage Indent rate goes up by 3%. See also Life of Loan Cap; Payment Cap.
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Annual Cap
Investopedia Financial Dictionary:
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Annual Cap
A clause found in the contract of an adjustable-rate mortgage (ARM) that limits the possible increase in the loan's interest rate to a certain amount each year. The cap is usually defined in terms of rate, but the dollar amount of the principal and interest payment can be capped as well. Annual caps are designed to protect borrowers against a sudden and excessive increase in the amount of their monthly payments when rates rise sharply over a short period of time.
Investopedia Says:
A loan with an annual rate cap will only increase by so much in terms of percentage points regardless of how much rates actually rise. A 5% ARM with a 2% cap can only adjust to 7%, even if rates increase by 4% over the initial fixed term of the loan. A loan with a dollar cap can only increase by so much as well, although this type of cap can lead to negative amortization in some cases.
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Barron's Banking Dictionary
Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.
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