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A cap is a ceiling, or the highest level to which something can go.
For example, an interest rate cap limits the amount by which an interest rate can be increased over a specific period of time. A typical cap on an adjustable rate mortgage (ARM) limits interest rate increases to two percentage points annually and six percentage points over the term of the loan.
In a different example, the cap on your annual contribution to an individual retirement account (IRA) is $4,000 for 2006 and 2007 and $5,000 in 2008, provided you have earned at least that much. If you're 50 or older, you can make an additional catch-up contribution of $1,000 each year.Yahoo Finance - Cite This Source - This Definition
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To prevent excessively high payment increases, ARM's place a cap on the amount by which the interest rate may rise at any single adjustment, over the life of the loan, or both.State of Maine, Department of Professional and Financial Regulation - Cite This Source - This Definition
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