A payment cap is a contractual limit on the percentage amount of adjustment allowed in the monthly payment for an adjustable rate mortgage (ARM) at any one adjustment period.

Generally a payment cap does not affect the interest rate charged. If the allowable payment does not cover interest amount due on the principal of the loan at the adjusted rate of interest, Negative Amortization, which is when the unpaid interest is added to your mortgage balance so that you owe more on your mortgage than you originally borrowed will occur.