What effect does a rate cap have on an ARM?

A rate cap on an adjustable-rate mortgage (ARM) serves the essential purpose of limiting how much the interest rate can increase during adjustment periods. This feature is crucial for borrowers because it provides a safeguard against significant spikes in interest rates that could lead to dramatically higher monthly payments. By specifying a maximum percentage increase at each adjustment interval or over the life of the loan, the rate cap helps create a more predictable and manageable borrowing experience despite the inherent variability in ARMs. This allows borrowers to plan their finances despite rate changes, reducing the risk of financial strain caused by rising borrowing costs.