Cap

Cap

In case of fluctuating interest rates in Adjustable Rate Mortgages, the borrower can exercise a pricing option at the time of application to cap a declining market rate. He is assured that the rates and points exisitng at the time will not rise with the market rates but neither can they come down if market rates decline. Caps have different terms depending on how often and when the borrower exercises this option. A cap is costly to the lender and thus costs the borrower more. Some ARMs may have a life cap but permit the interest rate to fluctuate freely for which they require a minimum payment which changes annually. This payment also has its limitations in how much it can change and this limit is also referred to as a cap.