Do adjustable-rate mortgages offer any protection against rising rates?
Yes. ARMs and other variable-rate-of-payment plans offer lower-than-market interest rates initially, but because they are tied to the interest rates of U.S. Treasury Bills or other indexes, interest rates later in the loan term may rise. However, many such loans offer built-in safeguards designed to minimize the effect of any rapid escalation in interest rates. One such safeguard is the rate cap. Many ARMs include provisions for the maximum amount your rate can rise, both annually and over the life of the loan. For example, if your initial rate is 6.5 percent, the loan may include one-percent annual and five-percent lifetime caps…which means even if rates rise dramatically, you’ll pay no more than 7.5 percent next year, 8.5 percent the following year and so on, until a maximum rate of 11.5 percent is reached. An ARM may also allow your rate to decrease when the index it is tied to goes down. As you might expect, decreases are usually capped as well. A second protective device include
