👋Interest Rate Caps 101

[Justin Goodin]

An interest rate cap is essentially an insurance policy on a floating interest rate loan.

This caps/limits the maximum interest expense exposure for a borrower using a floating-rate loan.

Lenders also benefit as they can require an interest rate cap at a rate threshold that helps ensure the borrower can service interest payments comfortably, limiting the risk of non-payment in a rising interest rate environment.

Floating interest rate debt has 2 components:

✔️ Benchmark Index
✔️ Spread

Benchmark Index + Spread = Total Interest Rate

The interest rate cap will set a maximum threshold for the index used.

Let me know what questions you have about interest rate caps below!