You know if you have an adjustable rate mortgage, of course, but do you know your cap rate? Adjustable rate mortgages, commonly called ARMs, have periodic and lifetime cap rates. Knowing both is the first step in deciding whether or not it is time to explore mortgage refinancing.
The periodic cap rate is the maximum interest rate increase allowed during a specific period of time. The lifetime cap rate is the most you can be charged over the life of the loan. For example, if your current rate is 4 percent then your periodic cap may only allow an increase of 2 percent per year with a lifetime cap of 10 percent. This means your mortgage payment can increase each year until it reaches the maximum rate.
If you own or are thinking of getting an adjustable rate mortgage, be sure to budget for increased rates. If you already own a home with an adjustable rate mortgage but can’t afford higher payments, consider exploring mortgage refinance options while rates are still low. A fixed rate mortgage might be a better fit for your finances.