Interest Rate Cap Calculator
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 (the "Cost") to buy this insurance.
- Protection: If the index rate rises above your Strike Rate, the cap provider pays you the difference.
- Requirement: Most commercial bridge lenders require a rate cap to ensure the property can handle debt service even if rates spike.
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Expert FAQ
What is a "Strike Rate" in an interest rate cap?
The Strike Rate is the maximum interest rate you will pay. If the underlying index (like SOFR) rises above this level, the cap provider pays the difference to the lender, effectively "capping" your interest expense.
Why are interest rate caps so expensive right now?
Cap pricing is based on volatility and market expectations of future rates. In a rising or uncertain rate environment, the risk to the cap provider is higher, leading to significantly higher premiums for the borrower.
How long does an interest rate cap typically last?
Caps are usually purchased for terms of 1, 2, or 3 years. They are rarely co-terminous with long-term loans; instead, lenders require borrowers to "renew" or "extension" the cap periodically throughout the loan life.
Is the cap premium refundable if rates don't rise?
No. Think of a cap as insurance. You pay the premium upfront to protect against a "catastrophic" rate spike. If the spike doesn't happen, the premium is lost, just like an insurance policy that was never claimed.
Does a cap protect against the "Spread" or just the "Index"?
A cap only covers the Index (usually SOFR or LIBOR). It does NOT protect against the lender's spread. If your loan is SOFR + 3% and you cap SOFR at 5%, your maximum total rate is still 8% (5% Index + 3% Spread).