Reading your note
ARM caps explained
Rate caps limit how far an adjustable mortgage rate can move. The first change, later changes, and the full life of the loan may each have a different limit.
First-adjustment cap
This limit applies only the first time the initial rate changes. It may allow a larger move than later adjustments. If the starting rate is 3.5% and the first upward cap is 2 percentage points, the first adjusted rate cannot exceed 5.5% because of that cap, even when the rounded index-plus-margin result is higher.
Periodic cap
The periodic cap applies at each later adjustment. It is measured from the rate immediately before that change, not from the original rate and not from the uncapped target rate.
A 1-point periodic cap means a 5% rate can generally move no higher than 6% at that adjustment. It does not mean the index-plus-margin result is reduced by 1 point.
Lifetime ceiling and floor
The lifetime ceiling is the highest note rate the contract permits. The lifetime floor is the lowest. These limits still apply when a first or periodic cap would otherwise allow the rate to move farther.
Some loan documents describe the ceiling as an absolute rate. Others describe a maximum increase over the initial rate. Enter the absolute ceiling shown by the note, or calculate it from the initial rate and stated lifetime increase when that is how the contract is written.
Upward and downward limits may differ
Do not assume the rate can fall as quickly as it can rise. A contract can use different upward and downward limits. The calculator therefore asks for them separately.
Zero is not the same as no cap
- 0 percentage points means the rate cannot move in that direction at that change.
- No cap means the note does not provide that particular limit.
- Blank or unknown means the calculator does not yet have enough information.
Those three states produce different results and should never be treated as interchangeable.
What a cap structure such as 2/1/5 means
People sometimes summarize an ARM using three numbers. A “2/1/5” structure commonly refers to a 2-point first-adjustment cap, a 1-point limit at later adjustments, and a 5-point lifetime increase over the initial rate. That shorthand is not enough to prove every contract detail. Always use the language in the actual note.
Why we show two risk numbers
The highest payment permitted at the next adjustment answers an immediate question. The payment at a reachable lifetime ceiling answers a longer-term risk question. They are separated because the lifetime ceiling may not be reachable at the next change.