What are the adjustment caps on an ARM designed for?

Adjustment caps on an adjustable-rate mortgage (ARM) are specifically designed to control the amount by which the interest rate can increase at each adjustment period. These caps help protect borrowers from steep interest rate increases that could make their loan payments unmanageable.

For instance, if an ARM has an adjustment cap of 2%, it means that when the interest rate adjusts at the end of a specified period (like annually), it can only increase by up to 2% from the previous interest rate. This feature allows borrowers to better anticipate their payment changes and manage their budgets over the life of the loan.

While other options address different aspects of mortgage loans, such as origination fees, minimum interest rates, or determining loan amounts, they do not pertain to the specific purpose of adjustment caps in ARMs. Understanding this concept is crucial for borrowers when considering an ARM, as it directly impacts their financial planning and potential exposure to interest rate fluctuations.