What is a 'Cap'

The highest point to which an adjustable rate mortgage (ARM) can rise in a given time period or the highest rate that investors can receive on a floating-rate type bond. The issuer typically sets the cap at the time the contract is issued. With an ARM, it is detailed in the terms of the mortgage document.

BREAKING DOWN 'Cap'

Homeowners that have adjustable rate mortgages (ARMs), which vary based on an underlying benchmark such as the prime rate, experience a fluctuation in their monthly mortgage interest rates. However, the amount by which the percentage rate on the loan can increase in a given period (typically quarterly) is capped at a certain rate. This is a safeguard for homeowners in case interest rates rise dramatically in a short period of time.

RELATED TERMS
  1. Adjustable-Rate Mortgage - ARM

    An adjustable rate mortgage is a type of mortgage in which the ...
  2. Lifetime Cap

    The maximum interest rate on an adjustable-rate mortgage (ARM) ...
  3. Convertible ARM

    An Adjustable Rate Mortgage (ARM) that gives the borrower the ...
  4. Annual Cap

    A clause found in the contract of an adjustable-rate mortgage ...
  5. Indexed ARM

    An adjustable-rate mortgage on which the interest rate adjusts ...
  6. Mortgage Rate

    The rate of interest charged on a mortgage. Mortgage rates are ...
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