payment cap - the maximum allowable periodic increase in a monthly payment or deed of trust under an adjustable rate instrument. For example, a mortgage with a $1,000/month payment and a 2% payment cap cannot increase to more than $1,020 at the next payment adjustment date. This does not mean that the interest rate increase must match the payment increase. If the allowable interest rate increase would have caused an increase in payment above the payment cap, the unpaid difference is added to the principal balance each month, resulting in negative amortization. See also adjustable rate mortgage, index, margin, negative amortization, lifetime cap, and payment adjustment date.

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