Which cap limits the amount the interest rate can increase during the first adjustment period for an ARM?

The initial rate cap is specifically designed to limit how much the interest rate can increase during the first adjustment period of an Adjustable Rate Mortgage (ARM). This cap provides borrowers with a level of predictability and security, as it sets a maximum percentage that the interest rate can rise after the initial fixed-rate period ends.

For example, if the initial rate cap is set to 2%, and the current interest rate is at 3%, at the first adjustment, the new rate could not exceed 5%. This helps borrowers prepare for potential changes to their monthly payments and ensures that the increase is manageable during what can be a critical period of adjustment.

In contrast, periodic rate caps apply to subsequent adjustment periods, lifetime rate caps restrict the total increase in interest over the life of the loan, and payment caps limit the increase in monthly payment regardless of how much the interest rate has changed. Thus, the focus on the first adjustment specifically aligns with the definition of the initial rate cap.