Cap

AAA

DEFINITION of '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.

INVESTOPEDIA EXPLAINS '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. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Annual Cap

    A clause found in the contract of an adjustable-rate mortgage ...
  3. Floater

    A bond or other type of debt whose coupon rate changes with market ...
  4. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  5. Prime Rate

    The interest rate that commercial banks charge their most credit-worthy ...
  6. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
RELATED FAQS
  1. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  2. In what instances does a business use closed end credit?

    The most common types of closed-end credit used by both businesses and individuals are mortgages and auto loans. Businesses ... Read Full Answer >>
  3. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>
  4. How was the American Dream impacted by the housing market collapse in 2008?

    The American Dream was seriously damaged by the housing market collapse in 2008. In many ways, the American Dream is a self-fulfilling ... Read Full Answer >>
  5. How much risk is associated with subprime mortgages?

    A large amount of risk is associated with subprime mortgages. Since the mortgages are specifically for people who do not ... Read Full Answer >>
  6. What are the financial consequences of filing for bankruptcy?

    The financial consequences of filing for bankruptcy are substantial and can be long-lasting. They include impacts on your ... Read Full Answer >>
Related Articles
  1. Insurance

    ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  2. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  3. Home & Auto

    When (And When Not) To Refinance Your Mortgage

    There are both good and bad reasons to refinance. Learn more about both here.
  4. Credit & Loans

    Why Fannie Mae And Freddie Mac Might Be In Trouble

    Fannie Mae and Freddie Mac are under increased scrutiny as debates continue about conservatorship, share price, and profit allocations.
  5. Credit & Loans

    Smart Ways to Use a Mortgage Calculator

    When you're buying a home, it's essential to do due diligence about the true costs. Mortgage calculators will show you if you can afford the purchase.
  6. Home & Auto

    How to Live Mortgage Free in a Tiny House

    Downsizing to a much smaller home – no more than 500 square feet – on your own or rented land can be a smart way to offload mortgage debt.
  7. Credit & Loans

    Calculating Interest Expense

    Interest expense is the cost of borrowing money.
  8. Economics

    What is a Subprime Mortgage?

    Subprime mortgages are offered to borrowers with low credit ratings, usually 600 or below.
  9. Home & Auto

    Strategies To Buy The Perfect Vacation Home

    Ask yourself these six questions to make the right decision about a vacation property.
  10. Economics

    How Does a Lien Work?

    A lien gives a creditor the legal right to seize and sell property, then use the proceeds to pay off a borrower’s debt.

You May Also Like

Hot Definitions
  1. Radner Equilibrium

    A theory suggesting that if economic decision makers have unlimited computational capacity for choice among strategies, then ...
  2. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  3. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  4. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  5. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  6. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!