In an adjustable-rate mortgage, what is a life cap?

In an adjustable-rate mortgage, a life cap refers to a limit on how much the interest rate can increase over the entire duration of the loan. This cap is crucial for borrowers because it provides a safeguard against significant rate hikes, which could make monthly mortgage payments unmanageable. By having a life cap, borrowers can better plan their finances, knowing the maximum interest they will have to pay over the life of the loan, regardless of market fluctuations.

This feature ensures predictability and stability, which is particularly important in volatile economic conditions. It protects borrowers from the risk of increasing interest rates beyond a specific point, thereby helping them maintain affordability over time.