Components of ARM 2

(c) Adjustment Interval The adjustment interval defines how often the interest rate can change. Common intervals are every year, every three years, or every five years. For example, in a "5/1 ARM," the rate is fixed for the first five years, and then it adjusts every one year thereafter.(d) Interest Rate Caps, Periodic Caps, and Lifetime Cap. To protect borrowers from extreme payment shock, ARMs include interest rate caps. A "periodic cap" limits how much the interest rate can change during any single adjustment interval (e.g., the rate cannot go up more than 2% in one year). A "lifetime cap" sets a hard limit on how high the interest rate can ever go over the entire life of the loan, ensuring the rate never exceeds a specific safety ceiling regardless of how high the index rises.(e) Payment Caps & Negative Amortization. Some ARMs include a payment cap, which limits how much the monthly payment amount can increase, regardless of how high the interest rate goes. While this keeps the monthly bill affordable, it can be dangerous. If the payment cap keeps the monthly payment artificially low while the interest rate rises significantly, the payment might not cover all the interest due.