Caps on your Adjustable Rate Mortgage protect you from large swings in the interest rate and monthly mortgage payment. If you are considering an Adjustable Rate Mortgage to finance your home you need to make sure you are protected. Here is what you need to know to minimize the risk of an adjustable interest rate.

If you finance your home with an Adjustable Rate Mortgage make sure the loan has periodic interest rate adjustment caps and a monthly payment cap. These caps protect you by minimizing risk from rising interest rates.

The periodic interest rate cap limits the amount your interest rate can change when the mortgage lender adjusts your interest rate. These periodic interest rate adjustments occur every six or twelve months depending on the lender. There are also lifetime caps on how much the interest rate can change over the duration of the mortgage.

The monthly mortgage payment cap limits the dollar amount the lender can raise your monthly mortgage payment. This does not limit the interest rate change. If you have a monthly payment cap but do not have the periodic interest rate cap you are asking for trouble. What happens in this case is the lender will raise your interest rate; however, the payment cap will not allow the payment to go up enough to cover all the interest due that month. The lender will add the unpaid interest on to the principal balance of your mortgage and viola; you have a negatively amortized mortgage. (A loan balance that gets bigger with time)

Caps are a great way to minimize the risk of an adjustable rate mortgage, when used correctly. To learn more about protecting yourself from the risks associated with Adjustable Rate Mortgages, register for a free mortgage guidebook.