A mortgage payment cap is the maximum allowable interest rate the lender can charge on your loan regardless of what happens in the market. Depending on your particular loan program, this is a percentage (usually 5% to 7.5% annually) that can be added to your fully indexed rate if the market warrants moving that high. For example, if your fully indexed rate is 8% and your annual cap is 6%, your loans life cap would be 14%.
Mortgage payment caps were designed to limit unrestricted increases by lenders and keep the borrowers payments at a manageable level. Some lenders impose payment caps, some impose interest rate caps and some lenders use both.
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