A rate cap is a limit on the interest rate that a lender may charge a borrower. Rate caps are used in a variety of ways but they are most commonly used to protect borrowers from sharp increases in interest rates. For example a borrower with a variable-rate mortgage may have a rate cap that limits how much the interest rate can increase over the life of the loan.
What is a rate cap?
A rate cap is an upper limit on the interest rate of a variable-rate loan or security.
How does a rate cap protect borrowers?
A rate cap protects borrowers by limiting the amount that the interest rate can increase over the life of the loan.
What is the formula for calculating a rate cap?
The formula for calculating a rate cap is the interest rate cap floor + the margin.
What is a collar?
A collar is an agreement between a borrower and a lender that sets limits on the interest rate of a variable-rate loan.
What is the difference between a rate cap and a collar?
The difference between a rate cap and a collar is that a collar also sets a floor on the interest rate while a rate cap only sets an upper limit.
What is the most common type of rate cap?
The most common type of rate cap is the periodic rate cap which limits the interest rate increase from one adjustment period to the next.
What is a Lifetime Rate Cap?
A Lifetime Rate Cap is an interest rate cap that limits the interest rate increase over the life of the loan.
What is a periodic rate cap?
A periodic rate cap is an interest rate cap that limits the interest rate increase from one adjustment period to the next.
What is a margin?
A margin is the interest rate that a lender charges over the prime rate.
What is the prime rate?
The prime rate is the interest rate that banks charge their most creditworthy customers.
What is a LIBOR?
LIBOR is the London Interbank Offered Rate which is the interest rate that banks charge each other for loans.
What is an ARM?
ARM stands for adjustable-rate mortgage.
What is a fixed-rate mortgage?
A fixed-rate mortgage is a loan with an interest rate that remains the same for the life of the loan.
What is a teaser rate?
A teaser rate is a low introductory interest rate that is offered for a limited time before the interest rate adjusts to a higher rate.
What is a negative amortization?
Negative amortization is when the monthly payments are not enough to cover the interest and the unpaid interest is added to the loan balance.
