Lifetime Cap

Adjustable-rate mortgages have payments that change as overall interest rates change.

When you think of a mortgage, a fixed-rate version probably comes to mind first. Those involve an interest rate, set at the time the mortgage gets signed, that doesn't change throughout the life of the contract. A 30-year mortgage with a 5.5% rate: you pay 5.5% every year for those 30 years, no matter what happens.

Adjustable-rate mortgages have rates that move as overall rates move. It might start with a 5.5% rate, but if overall interest rates rise 1 percentage point, your rate would rise to 6.5%. If they fall back down by half a percent, your rate will drop to 6%. And so on. Rates fluctuate over time in reaction to movement in overall rates.

However, rates don't change continuously. It's not a day-to-day process. You don't have to check LIBOR every evening just to know what your mortgage rate is on any given day.

Instead, there are pre-set time periods when the adjustments will happen. Also, there are often restrictions, or caps, on how far rates can move at any given time.

A lifetime cap restricts how far rates can move over the course of the mortgage. It provides an upper range for how high your rate can go. It provides some protection for the borrower, letting them know the maximum interest rate they will ever have to pay.

Your adjustable-rate mortgage starts at 5.5%. It has a lifetime cap of 12%. Your first adjustment happens after five years. Rates have risen, so your mortgage climbs to 7.5%. Next adjustment happens five years later. Another move higher, this time to 10%. At the next adjustment, a similar move has taken place. Without the cap, your mortgage would now climb to 12.5%. But there's a lifetime cap in place. It tops out at 12%.