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.


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.

  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. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  4. Floater

    A bond or other type of debt whose coupon rate changes with market ...
  5. Prime Rate

    The interest rate that commercial banks charge their most credit-worthy ...
  6. Teaser Rate

    An initial rate on an adjustable-rate mortgage (ARM). This rate ...
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