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Interest Rate Cap Premium Calculator
Rate caps act as rate insurance. This calculator estimates the premium given deal parameters.
Cap premium
$155,000
Premium (bps of notional)
155
Rate bump equivalent
0.78%
How the math works
Premium scales with moneyness (forward vs strike) and term. At-the-money caps cost much more than out-of-money caps.
Effective rate with cap ≈ floating coupon + cap amortization over term. Compare total cost to fixed-rate equivalent before buying cap — sometimes the fixed loan with prepay flexibility wins.
How to Use
- Enter notional amount.
- Enter strike rate.
- Enter forward rate index.
- Enter term years.
- Read premium and rate bump.
Frequently Asked Questions
Why buy a cap?
Lender requirement (most common) or sponsor risk management. Fixed-rate loans don't need caps; floating-rate loans above 70% LTV usually require a cap through term.
Premium vs coverage?
Premium is sunk cost at origination or capitalized. Coverage kicks in when index exceeds strike, paying the difference. Models payoff as max(index − strike, 0) × notional × day count.
Resizing at renewal?
Caps often renew annually on bridge loans. Lender may require new strike based on current spot; budget 50-150% higher premium on renewal than original quote.
How does this interact with the rest of the capital stack?
Each tier of the stack affects the next. Senior debt constrains LTC and DSCR. Mezz and pref consume equity spread. Interest rate hedges protect DSCR but cost premium. Always model the full stack holistically — optimizing one tier alone often degrades another. Institutional underwriters run three or four scenarios across the stack before committing capital.
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