Total floating-rate loan balance subject to the cap
Please enter your loan notional amount.
Term SOFR ~4.3-4.5% (Apr 2026). Verify at cmegroup.com.
Please enter the current SOFR rate.
Lender margin added to SOFR (e.g. SOFR + 2.50%)
All-in rate at which cap begins paying. Often lender-required.
Please enter the cap strike rate.
Indicative bps from your cap provider. 100-300 bps typical in 2026.
Monthly Cap Payout
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⚠️ Disclaimer: Cap payout calculations are based on the formula used by Chatham Financial and standard industry practice. Premium estimates are indicative only — actual premiums depend on live market rates, implied volatility, and counterparty terms. Always obtain a formal quote from Chatham Financial or a qualified derivative advisor.
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Sources & Methodology
Payout formula verified against Chatham Financial rate cap documentation and standard ISDA caplet mechanics.
Chatham Financial — Interest Rate Cap Payout Mechanics
chathamfinancial.com — Official payout formula: Cap payout = (Monthly day count fraction) x Notional x (Index rate − Cap strike).
CME Group — SOFR Reference Rates
cmegroup.com — Official SOFR daily reference rates. Term SOFR rates published for 1-month and 3-month tenors.
Monthly payout: max(0, SOFR − Strike) × Notional × (30/360)
Annual payout (if in-the-money): Monthly payout × 12
Premium estimate: Notional × (bps / 10,000) × (Term months / 12)
All-in rate: SOFR + Spread. Cap triggers when SOFR exceeds Strike.
Annual payout (if in-the-money): Monthly payout × 12
Premium estimate: Notional × (bps / 10,000) × (Term months / 12)
All-in rate: SOFR + Spread. Cap triggers when SOFR exceeds Strike.
Last reviewed: April 2026
How Interest Rate Caps Work
An interest rate cap is an insurance policy on floating-rate debt. The borrower pays an upfront premium to the cap provider (such as Chatham Financial). In return, whenever the floating benchmark (SOFR) exceeds the agreed strike rate, the cap provider makes monthly payments to the borrower covering the difference. This ensures the borrower's effective interest rate never exceeds the strike rate plus their loan spread.
Rate Cap Payout Formula
Monthly Payout = max(0, SOFR − Strike) × Notional × (30 / 360)
Example: $10M notional, 5.0% strike, SOFR at 6.0%
Payout = (6.0% − 5.0%) × $10,000,000 × (30/360) = 1% × $10M × 0.0833 = $8,333/month
If SOFR = 4.5% (below strike): Payout = $0 (cap is out of the money)
Payout = (6.0% − 5.0%) × $10,000,000 × (30/360) = 1% × $10M × 0.0833 = $8,333/month
If SOFR = 4.5% (below strike): Payout = $0 (cap is out of the money)
Cap vs. No Cap: Interest Cost Comparison
| SOFR Rate | Loan Spread | All-In Rate | Without Cap | With 7% Cap |
|---|---|---|---|---|
| 4.5% | 2.5% | 7.0% | $291,667/mo | $291,667/mo |
| 6.0% | 2.5% | 8.5% | $354,167/mo | $291,667/mo ✓ |
| 8.0% | 2.5% | 10.5% | $437,500/mo | $291,667/mo ✓ |
Based on $50M notional. Cap payment from provider offsets excess interest above 7% all-in.
When to Buy vs. When Caps Are Required
Most commercial real estate lenders require a rate cap as a condition of funding floating-rate bridge and construction loans. The lender specifies the maximum strike rate allowed (often tied to debt service coverage requirements). Even when not required, borrowers with floating-rate debt in a volatile rate environment often purchase caps voluntarily to protect cash flow and budget certainty.
💡 Pro Tip: Cap premiums are highly sensitive to rate levels and implied volatility. Lock in your cap at loan closing rather than waiting — premiums can change significantly day to day. Factor cap renewal costs into your underwriting when evaluating floating-rate deals, as a cap expiring mid-project may need to be renewed at a very different premium.
Frequently Asked Questions
An interest rate cap is a financial derivative that protects floating-rate borrowers from rising benchmark rates like SOFR. The cap seller pays the borrower when the floating rate exceeds the strike rate, effectively capping their maximum interest cost. Used primarily in commercial real estate bridge and construction loans.
Cap payout = max(0, Current Rate - Strike Rate) x Notional x (Period days / 360). Example: $10M notional, 5% strike, SOFR at 6%: Payout = (6% - 5%) x $10,000,000 x (30/360) = $8,333 for that monthly period.
SOFR (Secured Overnight Financing Rate) replaced LIBOR as the primary floating-rate benchmark for US commercial real estate loans after June 2023. SOFR is based on overnight Treasury repo transactions, making it more transparent and manipulation-resistant. Most new CRE caps are written on Term SOFR (1-month or 3-month).
Premium cost increases with: higher notional amount, longer term, lower strike rate (more protection = higher cost), higher current interest rates (cap is closer to being in-the-money), and higher implied volatility. Premiums spiked 10-20x in 2022-2023 as rates rose rapidly.
Commercial real estate lenders require rate caps on floating-rate bridge and construction loans to ensure borrowers can service debt even if benchmark rates surge. The cap guarantees the all-in rate never exceeds the strike, protecting both borrower cash flow and lender collateral quality.
As of April 2026, the Fed Funds rate is 3.50-3.75% (FOMC held rates at its March 2026 meeting). Term SOFR closely tracks this range, generally running 5-15 basis points above the Fed Funds rate. Verify the current rate at the CME Group SOFR reference rates page.
Rate caps typically match the loan term, usually 2-3 years for bridge loans and up to 5 years for longer construction loans. Caps are renewable at expiration, though the renewal premium depends on market conditions at that time.
A rate cap is an option — you pay a premium upfront and receive payments only if rates exceed the strike. A rate swap exchanges your floating rate for a fixed rate with no upfront premium. Caps provide asymmetric protection (you benefit from rate decreases) while swaps lock in a fixed rate regardless of market movement.
Yes. Most rate caps are transferable and can be assigned to a buyer as part of a property sale, subject to the cap counterparty's consent. If the cap has positive market value (rates are above the strike), it has intrinsic value that can be monetized or credited to the buyer.
With SOFR in the 4-5% range and implied volatility normalizing from 2022-2023 peaks, cap premiums have moderated. Indicative ranges: a 2-year cap at 5% strike on $10M might cost $150,000-$300,000 depending on current rate levels and volatility. Always obtain quotes from Chatham Financial or another derivative advisor for exact pricing.
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