Which term refers to safeguards that limit the interest rate on an adjustable-rate mortgage (ARM)?

The term that refers to safeguards that limit the interest rate on an adjustable-rate mortgage (ARM) is "Rate Cap." This is a crucial feature of ARMs because it protects borrowers from dramatic increases in interest rates over time. A rate cap stipulates a maximum interest rate that can be charged, which provides a level of predictability and security for the borrower.

For example, if an ARM has a rate cap of 5%, it cannot increase beyond that percentage until the next adjustment period, regardless of the conditions of the broader market. This mechanism ensures that the borrower will not face exorbitantly high monthly payments due to unforeseen spikes in interest rates.

In contrast, other terms have distinct meanings in the context of mortgages: a Rate Lock refers to the agreement to hold a specific interest rate for a certain period, a Rate Adjustment pertains to the actual process of changing the interest rate according to the terms of the loan, and a Rate Ceiling refers to the upper limit of the interest rate that can be applied but isn’t specifically focused on the periodic adjustments like a Rate Cap is.