An interest-rate cap places a limit on the amount your interest rate can increase. By law, all ARM's must have an overall cap. Many have a periodic interest rate cap. Payment Caps Some ARM's include payment caps, which limit your monthly payment increase at the time of each adjustment, usually to a percentage of the previous payment. Many ARM's with payment caps do not have periodic interest rate caps.
Negative amortization means the mortgage balance is increasing.
This occurs whenever your monthly mortgage payments are not large enough to pay all of the interest due on your mortgage. Because payment caps limit only the amount of payment increases, and not interest-rate increases, payments sometimes do not cover all of the interest due on your loan. This means that the interest shortage in your payment is automatically added to your debt, and interest may be charged on that amount. You might therefore owe the lender more later in the loan term than you did at the start. However, an increase in the value of your home may make up for the increase in what you owe.