What is an Interest Rate Cap?

An Interest Rate Cap is specifically designed to limit how much an interest rate can change over time. This is particularly relevant in adjustable-rate mortgages (ARMs) or other financial products where the interest rate may fluctuate based on market conditions. The cap ensures that the borrower is protected from potentially significant increases in interest rates, providing a degree of predictability regarding their monthly payments and overall borrowing costs.

Understanding interest rate caps is crucial for borrowers who are considering loans with variable interest rates, as these caps help mitigate the risks associated with interest rate volatility. For example, if a borrower has an ARM with a cap, they can rest assured that, regardless of market movements, their interest rate will not exceed the specified limit, making it easier to budget for future payments.