A loan with an annual rate cap will only increase by so much in terms of percentage points regardless of how much rates actually rise. A 5% ARM with a 2% cap can only adjust to 7%, even if rates increase by 4% over the initial fixed term of the loan. A loan with a dollar cap can only increase by so much as well, although this type of cap can lead to negative amortization in some cases.
Investment dictionary. Academic. 2012.
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