Question

2. Summarize the four types of caps that affect adjustable-rate mortgages

Answer 1

Answer-

The four types of caps that affect adjustable-rate mortgages are

1)

Initial adjustment cap - This cap refers to the interest rate that increases the first time it adjusts after the expiration of fixed-rate period. It’s common for the initial adjustment cap to be either 2 or more than that which means that at the first rate change the new rate can’t be more than that.

2)

Subsequent adjustment cap- This cap stipulates that by how much the interest rate can increase in the adjustment periods that subsequently follow later. This cap is in general 2%, whiich means that the new rate cannot be more than 2 % points higher than the previous rate.

3)

Lifetime cap - The lifetime cap stipulates the upper bound cap which the coupon rate cannot exceed it. This refers that if the adjusted loan rate exceeds the lifetime cap then the coupon rate remains at the lifetime cap. the adlusted rate coupon rate is fixed at the lifetime cap till the fully indexed loan rate goes below the lefetime cal after next adjustment.

4)

Periodic rate- This stipulates the cap that limits the adjusted rate coupon can change either way in the adjusted period. This inferes that if the underlying index increases or decreases by more than the periodic rate theadjyusted rate coupon changes only by value of periodic cap.