Finance
What is an 'interest rate cap' on an adjustable-rate mortgage and why does it matter?
AThe maximum total amount of interest the borrower can be required to pay over the life of the loan
BLimits on how much the interest rate can increase per adjustment period and over the life of the loan — protecting borrowers from extreme payment increases✓ Correct
CThe government-set maximum interest rate for all residential mortgages
DA fee charged by the lender for processing the loan application
Explanation
ARM interest rate caps limit rate increases. Periodic caps limit how much the rate can change per adjustment (e.g., 2% per adjustment). Lifetime caps limit the total change over the loan's life (e.g., 6% above the initial rate). Payment caps (on older ARMs) limited payment increases but could cause negative amortization. Caps protect borrowers from extreme increases.
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