Interest Rate Cap
A limit placed on how high a variable interest rate can increase.
Detailed Description
Interest Rate Cap
What is the primary function of an interest rate cap?
The primary function of an interest rate cap is to provide protection against rising interest rates by setting a maximum interest rate that a borrower will pay.
Who typically uses interest rate caps?
Interest rate caps are commonly used by corporations, real estate investors, and homeowners with floating-rate loans.
What are the different types of interest rate caps?
Types of interest rate caps include standard caps, flexible caps, rate cap collars, and long-term caps.
What are some benefits of using an interest rate cap?
Benefits include predictability in payments, risk management against rising rates, cash flow stability, and flexibility in benefiting from lower rates.
What risks are associated with interest rate caps?
Risks include the cost of premiums, market volatility, and counterparty risk if the cap seller defaults.