Periodic Cap

The periodic cap is the most the interest rate can increase or decrease at the designated interest rate change date. In the case of the Option ARM, there is no periodic cap. Theoretically, the interest rate could increase or decrease as much as the life-of-loan cap will allow. I stress theoretically, because the amount of increase or decrease is a function of the performance of the particular index. In all likelihood, the most agressively an index will adjust is probably around 0.25%. Most likely, the index will increase or decrease by around 1/10th or less per month. Again, check out the following link to obtain a history of your index:

http://mortgage-x.com/general/indexes/default.asp

Going back to our example, the 1% start rate was in effect for one month. Beginning with the second payment, the interest rate changes monthly thereafter. In the second month, our interest rate was 7.508% (margin of 2.75% plus index value of 4.758%). November's index value has been published which is 4.827%. Consequently, the index increased by .069% (4.827% - 4.758%), a less than 1/10% (0.100%) increase, which equates to a fully indexed interest rate of 7.577%. In our example, 7.577% will be the interest rate in effect for the third month.