Interest Rate Cap Calculator

The formulas

An interest rate cap is a separate financial contract layered on top of a floating-rate loan, not a loan term itself. The borrower (or the cap buyer) pays an up-front premium for it; in exchange, whenever the floating reference index rises above the agreed strike rate, the cap pays the buyer the difference for that period. Two formulas do the work:

Effective capped index rate = MIN(current index, strike rate) — the floating index the borrower effectively experiences can never exceed the strike, no matter how high the actual index goes. Add the loan's margin over that index to get the effective all-in rate.

Cap payoff per period = Notional × MAX(0, index rate − strike rate) ÷ periods per year — the cap seller owes the buyer this amount whenever the index is above the strike, and owes nothing when it is at or below the strike. This calculator assumes monthly periods and holds the index level constant across the remaining term to illustrate the mechanics; an actual cap's payoff varies period to period as the index moves and is confirmed against the specific contract and reset schedule.

Not the same as a capitalization rate

An interest rate cap and a capitalization rate share only a name fragment. A cap rate measures a property's net operating income against its price or value — it has nothing to do with interest rates or derivatives. An interest rate cap is a hedge against a floating rate rising past a set ceiling. If a search for "rate cap" landed here looking for property yield instead, the cap rate calculator is the one to use.

For background on the underlying vocabulary, see non-QM loan and interest-only DSCR loan, and run the payment side of a floating-rate deal through the DSCR calculator.