Payment Cap

The payment cap is the legal limit for the increase of a person's monthly payment when part of an adjustable-rate mortgage. These mortgages have rates that are indexed to some major financial indicator, and when the rate on that indicator rises or falls, the interest rate will accordingly rise or fall. The problem with adjustable-rate mortgages is that they can feature wild swings in one direction or another when the indicators are volatile. A payment cap, therefore, exists to ensure that a person is not railroaded with an incredibly large payment increase after some short-term financial disaster in the market. Payment caps are often percentage based: They will dictate, in certain circumstances, that a person's monthly payment amount cannot increase by more than 20 or 30 percent. This is an important control that makes the adjustable rate mortgage viable. Without payment caps, few people would be willing to take on the risks associate with these loans.