What is Rate Cap?
A rate cap limits how much the interest rate on an adjustable-rate mortgage can increase at each adjustment and over the life of the loan.
A rate cap is a protective limit on how high your adjustable mortgage rate can rise. Caps are usually expressed as a periodic adjustment cap, a lifetime cap, and sometimes an initial adjustment cap. Borrowers encounter these limits in the loan estimate and note when considering an adjustable-rate mortgage. They matter because they provide certainty about the maximum possible payment. Watch for the difference between the initial, periodic, and lifetime caps, and note that a cap only limits increases, not decreases. Even with caps, your payment can still rise significantly if the index increases, so review the full cap structure.
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