Subsequent Rate Cap
Definition and meaning of Subsequent Rate Cap in real estate.
A subsequent rate cap is a limit on how much the interest rate of an adjustable-rate mortgage can increase or decrease during any single scheduled adjustment period after the first adjustment. This cap protects borrowers from sudden, large interest rate spikes that could cause payment shock.
In more detail
Adjustable-rate mortgages typically feature a structure of caps, which include an initial cap, subsequent caps, and a lifetime cap. The subsequent rate cap applies to every adjustment after the very first interest rate change. For instance, if a loan has a subsequent cap of two percentage points, the interest rate cannot increase by more than that amount at any single adjustment interval, regardless of how much the underlying financial index has risen.
Knowing this limit helps borrowers calculate their worst-case scenario monthly payments. It is critical for home buyers to review their loan disclosures to understand these limits.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Applies to | Adjustable-rate mortgages |
| Purpose | Limits interest rate volatility |
| Watch out for | Difference between initial and subsequent caps |
A homebuyer has an adjustable-rate mortgage with a subsequent rate cap of two percentage points, meaning that even if the index rate jumps by three percentage points in a single year, the borrower's rate can only increase by a maximum of two percentage points for that year.
Frequently asked questions
Does a subsequent rate cap apply to the first rate adjustment?
No, the first adjustment is governed by the initial rate cap, which is often higher than the subsequent rate cap.
Can a subsequent rate cap also limit rate decreases?
Yes, in many adjustable-rate loans, the caps are symmetric and limit both the upward and downward movements of the interest rate during an adjustment.