Caps apply to adjustable rate mortgages (ARMs). To minimize the risk of extreme fluctuations in interest rates, caps are imposed on your rate. Caps protect you by limiting the percentage by which your rate can increase. An interest cap places an annual limit on the percentage by which a payment can increase at each adjustment period. For example, if your initial rate is 6% and your interest cap is 1 percentage point, your interest rate can rise to no more than 7% within the next year. See also caps.