What is the effect of a cap on an adjustable-rate mortgage?

The correct answer highlights that a cap on an adjustable-rate mortgage (ARM) stabilizes the interest rate changes. In the context of ARMs, a cap is a limit on how much the interest rate can increase (or decrease) during a specified period or over the life of the loan. This mechanism provides protection to the borrower by ensuring that their interest rate won't rise beyond a certain point, which helps them manage their financial obligations and avoid skyrocketing payments.

This stability is crucial for borrowers, as it mitigates the risk associated with fluctuating interest rates that can lead to higher monthly payments. The presence of caps can be particularly important in economic environments where base rates, such as those influenced by the Federal Reserve, are changing frequently.

The other options do not accurately reflect the role of a cap in an adjustable-rate mortgage. For instance, caps don't increase the borrower's loan amount, nor do they eliminate the need for a down payment. Furthermore, caps specifically exist to limit the potential for considerable increases in interest rates, rather than allowing for unlimited increases. Thus, the correct understanding of a cap is its role in providing a safety net against drastic changes in payment amounts, making option B the accurate choice.