Interest rate cap

An interest rate cap is a regulatory measure that sets a maximum limit on the interest rate that can be charged on a loan. For homeowner associations, this concept is often applied to adjustable-rate mortgages (ARMs). ARMs are loans with interest rates that can change over time, usually in relation to an index. While these types of loans can offer lower initial interest rates, there is a risk for homeowners: the rate can increase significantly over the life of the loan.

To protect homeowners from these sudden, potentially large increases in payments, many ARMs include an interest rate cap. This cap sets a maximum limit on how much the interest rate can increase. Caps can be structured in various ways. For instance, periodic rate caps limit the interest rate increase from one adjustment period to the next. On the other hand, lifetime rate caps set a limit on how much the interest rate can increase over the life of the loan.

It is crucial for homeowners and homeowner associations to understand the terms and conditions of any loan, including whether it includes an interest rate cap and how that cap works. Knowing this information can help avoid surprises and better plan for future payments.