Which cap specifically limits how much the interest rate can change during adjustment periods of an ARM?

The correct answer is the Periodic Rate Cap. This cap is specifically designed to limit the amount that the interest rate on an Adjustable Rate Mortgage (ARM) can increase or decrease during each adjustment period, which typically occurs at set intervals (e.g., annually, semi-annually, etc.) after the initial fixed-rate period. By implementing a periodic rate cap, borrowers are protected from significant fluctuations in their monthly payments during these adjustment periods, ensuring that any changes to the interest rate are gradual and manageable.

Understanding how a periodic rate cap functions is crucial for borrowers considering an ARM since it directly affects their potential payment stability and financial planning. It helps them anticipate the maximum amount their interest rate can rise during each adjustment and informs their decisions around budgeting and future homeownership costs.