Cap (Rate Cap)

In real estate financing, a cap refers to the limit placed on how much the interest rate on an adjustable-rate mortgage (ARM) may increase. Caps are designed to protect borrowers from sudden or excessive payment increases by restricting rate adjustments over specific periods. There are typically different types of caps, including periodic caps that limit how much the rate can change at each adjustment, and lifetime caps that limit the total increase over the life of the loan. By setting these maximums, caps help provide predictability and reduce risk for borrowers, making adjustable-rate mortgages more manageable despite fluctuations in market interest rates.