Interest Rate Cap Calculator
Estimate the upfront cost of an interest rate cap for your commercial floating-rate loan (SOFR, Prime, etc).
The maximum rate you pay.
Current 1-month SOFR or Reference Rate.
What is an Interest Rate Cap?
An Interest Rate Cap is a financial derivative that protects a borrower on a floating-rate loan (like SOFR) from rising interest rates. It effectively sets a maximum interest rate (the "Strike Rate") for the loan term.
- Upfront Cost: You pay a one-time premium to buy the cap.
- Protection: If the index rate (e.g., SOFR) rises above your Strike Rate, the cap provider pays you the difference.
- Requirement: Most commercial bridge lenders require a rate cap to ensure you can afford debt service even if rates spike.
How is the Cost Calculated?
The cost depends on three main factors:
- Strike vs. Market Rate: If the Strike Rate is below the current market rate ("in-the-money"), the cap is very expensive because it pays out immediately.
- Term: Longer terms mean more uncertainly and higher costs.
- Volatility: Higher market volatility increases the probability of rates spiking, thus increasing the cap cost.
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Frequently Asked Questions
Why do I need a rate cap?
Most floating-rate bridge lenders (e.g., for multifamily value-add) require borrowers to purchase a rate cap to hedge against interest rate risk. It ensures the DSCR remains above 1.0x even in a high-rate environment.
What happens if I don't buy a cap?
If your loan documents require it, you will be in technical default. Practically, if rates rise without a cap, your monthly interest payments could skyrocket, potentially leading to foreclosure.
Is the cost refundable?
No, the rate cap cost is a one-time premium paid to a third-party derivative provider (like SMBC, Chatham, etc.) and is not refundable, similar to insurance.