In real estate finance, a payment cap is a limit placed on the amount that a borrower’s periodic payment can increase under an adjustable mortgage loan. This cap applies regardless of how much the interest rate rises during an adjustment period.
When a payment cap restricts the payment to an amount that is less than the interest accruing on the loan, negative amortization may occur. In such cases, the unpaid interest is added to the loan balance, increasing the total amount owed over time.
