Cap

The limit on how much the interest rate or monthly payment on an adjustable rate mortgage (ARM) can go up or down

Most ARMs have several types of interest rate caps: (1) lifetime caps, which are required by law, that limit the increase and decrease of a rate over the full course of a loan. (2) The first adjustment cap, which limits the rate change on the ARM's initial adjustment; and (3) the subsequent adjustment caps (also called periodic caps), which limit the rate changes on the following adjustment periods, even if the market interest rates significantly rise or fall during this time.

Example: A worst-case scenario of an ARM that reaches the maximum cap Initial Rate = 6%
Lifetime Cap = +6%
Periodic Cap = +2%
Adjustment Period = annual

If the ARM hits the periodic cap each year, in three years the ARM would reach the 12% lifetime cap.

See Also:	Adjustable rate mortgage, Negative amortization

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