clause in an adjustable-rate mortgage (ARM) limiting any increase in the interest rate during a calendar year adjustment period to a preset amount or ceiling, giving the borrower a cushion against a sudden increase in mortgage payments and payment shock when the loan rate is adjusted, particularly in periods of rising interest rates. A 10% mortgage with a 2% annual cap will increase only to 12% even if the mortgage indent rate goes up by 3%.
a limit on the amount of adjustment in the interest rate on an Adjustable Rate Mortgage over a twelve-month period.
Example: An adjustable rate mortgage has a current interest rate of 8% and an annual cap of 2 percentage points. After one year, the highest the interest rate can be is 10% and the lowest it can be is 6%, due to the cap.
