Business Definition for: annual cap
annual cap
clause in an
adjustable-rate mortgage (ARM)
limiting any increase in the interest rate during a calendar year adjustment period to a preset amount or ceiling, giving the borrower a cushion against a sudden increase in mortgage payments and
payment shock
when the loan rate is adjusted, particularly in periods of rising interest rates. A 10% mortgage with a 2% annual cap will increase only to 12% even if the mortgage indent rate goes up by 3%.
See also
payment cap
,
life of loan cap
annual cap
a limit on the amount of adjustment in the interest rate on an
Adjustable Rate Mortgage
over a twelve-month period.
Example: An adjustable rate mortgage has a current interest rate of 8% and an annual cap of 2 percentage points. After one year, the highest the interest rate can be is 10% and the lowest it can be is 6%, due to the cap.
See also
cap
Related Terms:
clause in an adjustable-rate mortgage (ARM) limiting monthly payment adjustments, usually restricting the increase to a percentage of the previous payment. An ARM with a 71/2% payment cap and monthly payments of $100 can increase to no more than $107.50 in the first adjustment period, and $115.56 in the second.
contractual provision in an adjustable-rate mortgage limiting the interest rate increase over the amortized life of the loan. For example, a 10% interest rate with a 5% lifetime cap may not increase more than 5% while the loan is outstanding.
Bonds: highest level interest rate that can be paid on a floating-rate debt instrument. For example, a variable-rate note might have a cap of 8%, meaning that the yield cannot exceed 8% even if the general level of interest rates goes much higher than 8%.
Mortgages: highest interest rate level that an adjustable-rate mortgage (ARM) can rise to over a particular period of time. For example, an ARM contract may specify that the rate cannot jump more than two points in any year, or a total of six points during the life of the mortgage.
Stocks: short for capitalization, or the total current value of a company's outstanding shares in dollars. A stock's capitalization is determined by multiplying the total number of shares outstanding by the stock's price. Analysts also refer to small-, medium-, and large-cap stocks as a way of distinguishing the capitalizations of companies they are interested in. Many mutual funds restrict themselves to the small-, medium-, or large-cap universes. See also collar.
Referring Terms:
Copyright c 2006, 2000, 1997, 1993, 1990 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
Copyright © 2004, 2000, 1997, 1993, 1987, 1984 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
