What is the function of a payment cap in a mortgage?

The function of a payment cap in a mortgage is to limit the monthly payment increase in any given year. This feature is particularly significant in adjustable-rate mortgages (ARMs), where the interest rate can fluctuate based on market conditions. A payment cap helps borrowers manage their financial planning and budgeting by imposing a maximum increase on the monthly payment, regardless of how much the interest rate may rise during the loan's term.

This can provide a level of predictability for borrowers, giving them protection against drastic increases in payments that could lead to financial strain or difficulty in making monthly payments. It allows them to prepare for gradual increases rather than the possibility of a sudden and substantial financial burden. Consequently, a payment cap is a critical component for borrowers who may be concerned about their ability to manage potential fluctuations in their mortgage payments.