For what purpose would an adjustable-rate mortgage include a payment cap?

An adjustable-rate mortgage (ARM) typically includes a payment cap primarily to limit the amount by which the monthly payments can increase during each adjustment period. This cap provides borrowers with a level of predictability and protection against drastic increases in their mortgage payments, which could occur if interest rates rise significantly.

In an ARM, the interest rate is subject to change after an initial fixed period, and without a payment cap, these increases could lead to unaffordable monthly payments, potentially resulting in financial strain for the borrower. By implementing a payment cap, lenders offer a safeguard that enables borrowers to manage their budgets more effectively while still benefiting from the lower initial rates that ARMs often provide compared to fixed-rate mortgages.

This would not be related to aspects such as lowering down payment requirements, ensuring fixed returns for investors, or guaranteeing interest rate stability, as these focus more on the financing structure or investor outcomes rather than the borrower's payment experience.