Cap or Cap Rate
Real estate word of the day, cap or category. So what we’re going to do is define it, use it in a sentence and talk about it briefly.
All right. So cap or cap rate is the amount. An adjustable rate mortgage can fluctuate upwards on both an annual or lifetime basis.
Very good. So there is two kind of key variables there. And it can go up either annually. Sometimes it might be quarterly. You know, there’s there’s an adjustment time frame and then there’s a total cumulative adjustment that can go up by. Right. So I might say that my adjustable rate mortgage has a cap of less that number, whatever it happens to be. And that would be it. Right.
Or maybe ask your lender what the cap rate is on your mortgage. OK. And so the idea here is that it could fluctuate during different times. All right. And what it is, is it’s the rate plus the margin or the index plus the margin. So they’re going to identify some index that it’s based on the most common one and are like LIBOR is a super common one. And what it’ll do is it’ll take the whatever the current LIBOR is that’s out there and it adds a margin or the profit to it.
And then those two numbers combined give you your total cumulative rate. And what happens is the cap is how much that if the LIBOR goes up like this, where that cap is, if you have a time when you take out a mortgage, interest rates are super, super low and then they do slowly go up.
You’ll kind of like hit this staircase of a cap each year or every time that you could lock in that kind of adjustment. So you might be slightly behind, but eventually, if it does go way up like this, it might just take a longer period of time to get to there to you eventually would hit that lifetime kind of number. Yeah, it’s just it’s it’s an adjustable rate mortgage and it’s related to it.