Interest Rate Ceiling refers to the maximum interest rate that a financial institution charges on an adjustable rate mortgage (ARM). The rate is specified in the mortgage loan agreement and is regulated by the government.
The rate ceiling depends upon the lifetime cap which limits the increase or decrease in the indexed rate on an ARM over the life of the loan. The lifetime cap varies from one lender to another. Most ARMs have a lifetime cap of 5% or 6%.
[b:35f389ec3a]Example:[/b:35f389ec3a] Suppose the index linked to the adjustable rate mortgage is 5% and the margin is 3%. Then the indexed rate or the actual rate charged on the loan is = 5% + 3% = 8%. Now, if the ARM has a lifetime cap of 6%, then the mortgage rate cannot increase or decrease by more than 6% throughout the life of the loan. That is, the maximum interest rate or [b:35f389ec3a]the rate ceiling [/b:35f389ec3a]over the loan period will be 14% (8% + 6% = 14%).
[list:35f389ec3a][*:35f389ec3a]More on Rate Caps[/list:u:35f389ec3a]