Cap

If you're taking out any kind of variable rate loan (which is a roll of the dice, because it means rates can move around on you), you will be very happy if it comes with a cap. That means there is a limit on how high the interest rate can go. This way you are somewhat protected if rates shoot up, but you can still take advantage if they go down. However, the cap usually applies both ways. The loan will most likely be an indexed rate that states just how low the lender is willing to go.

Capped interest rates are most frequently offered with adjustable rate mortgages (ARM) and floating rate bonds. An ARM might start out with a fixed rate for a few years and then the lender can either change the rate at any time or at specific intervals.