Lifetime Cap

Posted in Finance, Accounting and Economics Terms, Total Reads: 194

Definition: Lifetime Cap

The highest rate of interest which is applicable on an Adjustable-Rate Mortgage (ARM) that might be levied at any of the instances over the complete life of the loan amount. The cap for the lifetime is normally calculated as a percentage rise from an earlier interest rate. For example, if an ARM for a fixed period has a starting fixed interest rate of 6% and a lifetime cap of 7%, the maximum rate of interest that would be charged is 13%. Lifetime caps are normally part of a loan's interest rate cap structure consisting of initial, periodic and life caps.

As such, a benchmark index is used to derive the interest rates for the ARMs, for example, the London Interbank Offered Rate (LIBOR), therefore, lifetime caps control the risk factor of substantial interest rate hikes over the term of the loan. Starting and periodic caps put an upper limit to the amount by which an ARM's rate of interest can go up at any single date of interest rate adjustment.

Some of the loans have upper limits for the interest rate which are very much similar to, and many times also called as, lifetime caps. However, an upper limit to the interest rate is normally expressed as an absolute value in percentage. For instance, the terms of the contracts of the loan may state that the highest interest rate shall never exceed 14%.



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