CAP in adjustable rate mortgages (ARMs) refers to a limit placed on adjustments to protect the borrower from large increases in the interest rate or the payment level. There are different types of caps, including annual caps, lifetime caps (life-of-loan caps), and payment caps. This measure helps borrowers by providing predictability and stability in their mortgage payments.
A contractual limit on the percentage amount of adjustment allowed in the monthly payment for an adjustable-rate mortgage at any one adjustment period, which can lead to negative amortization if the payment does not cover the interest due.
