Capped Rate

A capped rate is well, just like it sounds...a rate that is capped. In home financing terms, it is an interest rate that has been capped at a certain percent and cannot ever go above that set mark.

Let's say you're buying your dream house for a cool $900,000 bucks. You're discussing the details of your forever loan with your mortgage guy and he's droning on with the boring details of origination fees, PMI, closing costs, and attorney's fees, but you're only thinking about the stupidly, ridiculous amount of time that you'll be paying on the loan and about how much it's really going to cost you in the long run.

He's getting to the part about a capped rate and never having to pay more than x%...which suddenly peaks your interest (sounds like you might be saving a little dough on this baby). He explains that the current variable rate on your mortgage is 3.5% but because it's variable, this can fluctuate with the market. However, the interest is capped at 6% which means your rate will never go above that. Sounds like a deal! Until he says that you were actually only approved for a $90,000 loan. Humph.