Definition
An initial adjustment cap is a limit on how much an interest rate can increase during the very first adjustment period of an adjustable-rate mortgage.
Understanding Initial Adjustment Caps
The initial adjustment cap is important when you first start an adjustable-rate mortgage (ARM). It sets the limit on how much the interest rate can increase or decrease after the fixed-rate period ends. In simple terms, it protects against sudden large rate jumps. Example: If your ARM has a 5% initial adjustment cap, and your starting rate is 3%, the rate can rise to a maximum of 8% at the first adjustment. It's not a guarantee that rates will hit the cap; it only marks the maximum possible change. People often think it limits future adjustments, but it only applies to the first one.
