# What Is An Interest Rate Cap

An interest rate cap is an upper limit on the interest rate of a loan. It is a contractual agreement between a borrower and a lender that limits the interest rate on a loan to a specified percentage above a specified reference rate usually the prime rate. Caps are often used in adjustable-rate mortgages (ARMs) to limit how high the interest rate can go.

An interest rate cap protects the borrower from rising interest rates but it also limits the interest rate reduction the borrower may enjoy if rates fall.

Caps are usually expressed in terms of a maximum interest rate but they may also be expressed as a maximum monthly payment increase or a maximum increase in the monthly payment rate.

(From https://www.investopedia.com/terms/i/interestratecap.asp)

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An interest rate cap is an upper limit on the interest rate of a loan. It is a contractual agreement between a borrower and a lender that limits the interest rate on a loan to a specified percentage above a specified reference rate usually the prime rate. Caps are often used in adjustable-rate mortgages (ARMs) to limit how high the interest rate can go.

An interest rate cap protects the borrower from rising interest rates but it also limits the interest rate reduction the borrower may enjoy if rates fall.

Caps are usually expressed in terms of a maximum interest rate but they may also be expressed as a maximum monthly payment increase or a maximum increase in the monthly payment rate.

For example let’s say you have an adjustable-rate mortgage with a 5% interest rate cap. This means that your interest rate cannot increase more than 5% above the starting rate no matter how high interest rates go. However if interest rates fall you will only benefit from a 5% decrease in your interest rate.

Caps are often put in place to protect borrowers from large increases in their monthly payments but they can also limit the amount of money a borrower can save if interest rates fall.

(From https://www.thebalance.com/interest-rate-caps-definition-and-example-4070571)

## What is an interest rate cap?

An interest rate cap is a type of financial derivative that gives the holder the right but not the obligation to receive payments at specified intervals up to a predetermined interest rate in exchange for periodic payments.

The interest rate cap protects the holder against rising interest rates.

## How does an interest rate cap work?

An interest rate cap works by capping the interest rate at a specified level.

If the interest rate rises above the specified level the holder of the interest rate cap will receive payments from the counterparty.

If the interest rate remains below the specified level the holder will not receive any payments.

## What is the benefit of an interest rate cap?

The benefit of an interest rate cap is that it protects the holder against rising interest rates.

## How is an interest rate cap different from an interest rate swap?

An interest rate swap is a type of financial derivative that allows two parties to exchange interest payments on a specified principal amount.

An interest rate cap is a type of financial derivative that gives the holder the right but not the obligation to receive payments at specified intervals up to a predetermined interest rate in exchange for periodic payments.

## What is the difference between an interest rate collar and an interest rate cap?

An interest rate collar is an agreement between two parties that sets upper and lower limits on the interest rate that one party will pay to the other over a specified period of time.

An interest rate cap is a type of financial derivative that gives the holder the right but not the obligation to receive payments at specified intervals up to a predetermined interest rate in exchange for periodic payments.

## What is the difference between an interest rate floor and an interest rate cap?

An interest rate floor is a type of financial derivative that gives the holder the right but not the obligation to receive payments at specified intervals up to a predetermined interest rate in exchange for periodic payments.

An interest rate cap is a type of financial derivative that gives the holder the right but not the obligation to receive payments at specified intervals up to a predetermined interest rate in exchange for periodic payments.

## What is an interest rate swap?

An interest rate swap is a type of financial derivative that allows two parties to exchange interest payments on a specified principal amount.

## What is the difference between an interest rate swap and a currency swap?

A currency swap is a type of financial derivative that allows two parties to exchange interest payments and principal in two different currencies.

An interest rate swap is a type of financial derivative that allows two parties to exchange interest payments on a specified principal amount.

## What is a currency swap?

A currency swap is a type of financial derivative that allows two parties to exchange interest payments and principal in two different currencies.

## What is the difference between an interest rate cap and a currency swap?

A currency swap is a type of financial derivative that allows two parties to exchange interest payments and principal in two different currencies.

An interest rate cap is a type of financial derivative that gives the holder the right but not the obligation to receive payments at specified intervals up to a predetermined interest rate in exchange for periodic payments.

## What is an interest rate collar?

An interest rate collar is an agreement between two parties that sets upper and lower limits on the interest rate that one party will pay to the other over a specified period of time.

## What is the difference between an interest rate collar and an interest rate floor?

An interest rate floor is a type of financial derivative that gives the holder the right but not the obligation to receive payments at specified intervals up to a predetermined interest rate in exchange for periodic payments.

An interest rate collar is an agreement between two parties that sets upper and lower limits on the interest rate that one party will pay to the other over a specified period of time.

## What is the difference between an interest rate collar and an interest rate ceiling?

An interest rate ceiling is a type of financial derivative that gives the holder the right but not the obligation to receive payments at specified intervals up to a predetermined interest rate in exchange for periodic payments.

An interest rate collar is an agreement between two parties that sets upper and lower limits on the interest rate that one party will pay to the other over a specified period of time.

## What is the difference between an interest rate floor and an interest rate ceiling?

An interest rate floor is a type of financial derivative that gives the holder the right but not the obligation to receive payments at specified intervals up to a predetermined interest rate in exchange for periodic payments.

An interest rate ceiling is a type of financial derivative that gives the holder the right but not the obligation to receive payments at specified intervals up to a predetermined interest rate in exchange for periodic payments.

## What is the difference between an interest rate swap and an interest rate ceiling?

An interest rate swap is a type of financial derivative that allows two parties to exchange interest payments on a specified principal amount.

An interest rate ceiling is a type of financial derivative that gives the holder the right but not the obligation to receive payments at specified intervals up to a predetermined interest rate in exchange for periodic payments.