What limits the amount the interest rate can increase or decrease over the life of a mortgage?

The life cap is a crucial feature in many mortgage agreements that directly affects the maximum limit of interest rate fluctuations over the term of the loan. It sets an upper boundary on how much the interest rate can increase from its initial rate during the life of the mortgage. This is especially relevant for adjustable-rate mortgages (ARMs), where rates can change over time based on market conditions.

By having a life cap in place, borrowers gain protection against dramatic increases in interest rates that could lead to significantly higher monthly payments. This offers peace of mind, knowing that there is a ceiling to how much their mortgage rate can rise, which helps in budgeting and financial planning.

While other concepts, such as an interest rate lock, payment adjustment clauses, and amortization schedules, play important roles in mortgage processes, they do not specifically limit how much the interest rate itself can change over the life of the mortgage. Therefore, the life cap is the correct answer to this question, as it ensures a form of predictability and security for borrowers in variable interest rate loans.