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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.
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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.
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