What consumer protection limits the changes in interest rates on an Adjustable Rate Mortgage (ARM)?

The correct answer is that caps limit the changes in interest rates on an Adjustable Rate Mortgage (ARM). Caps are crucial features of ARMs as they specify the maximum amount that the interest rate can increase during specific periods, such as annually or over the life of the loan. This provides borrowers with a degree of predictability regarding their future payment obligations, protecting them from significant fluctuations in interest rates that could lead to unmanageable payment amounts.

The presence of caps ensures that even if market interest rates rise sharply, the rate adjustment on the mortgage will remain within defined limits, offering a safeguard for borrowers against unexpected increases in their mortgage payments. Understanding how caps function is essential for potential borrowers as they evaluate the risks associated with ARMs compared to fixed-rate mortgages.

Other options refer to different concepts in mortgage lending. For instance, a payment cap limits the payment amount but does not necessarily protect against interest rate increases themselves. The annual percentage rate is a broader measure that reflects the total cost of borrowing over a year, including interest and fees, but does not specifically address interest rate adjustments. The amortization term refers to the length of time over which the loan is repaid and doesn't impact the interest rate changes.