finance
rate cap
A rate cap limits how much the interest rate on an adjustable-rate mortgage can change. A periodic cap limits the change at each adjustment, and a lifetime cap limits the total increase over the life of the loan. Many loans also have an initial adjustment cap. Rate caps protect borrowers from sudden large payment increases, unlike payment caps, which can lead to negative amortization.
- Exam tip
- Rate caps limit the rate; payment caps limit the payment and can cause negative amortization. Know periodic versus lifetime caps.
- Example
- An ARM starting at 5% with a 2% periodic cap and 5% lifetime cap can rise to 7% at the first adjustment and never above 10%.
Related terms & state variants
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Last verified: 2026-10-23