$
Total floating-rate loan balance
Enter loan amount%
Current benchmark rate (e.g. SOFR)
Enter current index rate%
Spread added to index rate
Enter spread%
Rate at which cap pays out
Enter strike rate📅
Length of rate cap agreement
Enter cap termCurrent All-In Rate
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How to Use the Chatham Rate Cap Calculator
A Chatham Financial rate cap is an interest rate derivative that protects borrowers with floating-rate commercial real estate (CRE) loans from rising benchmark rates like SOFR. When rates exceed the strike rate, the cap seller pays the difference, effectively capping your borrowing cost.
- Loan Amount — Enter your total floating-rate loan balance subject to the cap.
- Current SOFR/Index Rate — Enter today's benchmark rate (SOFR, Prime, LIBOR replacement).
- Loan Spread — Your lender's fixed margin added to the index (e.g., SOFR + 2.50%).
- Strike Rate — The all-in rate at which your cap begins paying out. Many lenders require a cap at or below a specified level (e.g., 8.00%).
- Cap Term — The number of months your cap agreement covers, typically matching your loan term.
- Cap Premium — The upfront one-time cost quoted by Chatham Financial or another cap provider.
💡 Lender requirement: Most bridge lenders and construction lenders with floating-rate CRE loans require borrowers to purchase an interest rate cap as a loan condition. Chatham Financial is the most widely used rate cap advisory and trading platform in commercial real estate.
What Is an Interest Rate Cap?
An interest rate cap is an over-the-counter (OTC) derivative contract that sets a maximum interest rate on a floating-rate loan. The cap buyer (borrower) pays an upfront premium to the cap seller (typically a bank or derivative dealer). If the reference rate (SOFR) exceeds the agreed strike rate on any reset date, the seller pays the borrower the difference on the notional loan amount.
Cap Payoff = MAX(0, Index Rate − Strike Rate) × Loan Amount × (Days/360)
Example: $5M loan, SOFR at 6.50%, strike at 5.50%
Monthly payoff = (6.50% − 5.50%) × $5,000,000 × (30/360) = $4,167/month
Monthly payoff = (6.50% − 5.50%) × $5,000,000 × (30/360) = $4,167/month
Key Rate Cap Terms
- Strike Rate — The index level above which the cap pays out. Lower strikes = more protection = higher premium.
- Notional Amount — The loan balance used to calculate the cap payoff (not exchanged).
- Cap Premium — The one-time upfront cost to purchase the cap, quoted in dollars.
- SOFR (Secured Overnight Financing Rate) — The primary floating-rate benchmark that replaced LIBOR in 2023 for CRE loans.
- All-In Rate — Index rate + spread. Your effective borrowing rate without the cap.
⚠️ Rate cap premiums surge with volatility. Cap costs spiked 10–20× in 2022–2023 as rates rose rapidly. Always budget for cap renewal costs when underwriting a floating-rate CRE deal.
Frequently Asked Questions
What is a Chatham rate cap and why do lenders require it?
A Chatham rate cap is an interest rate cap arranged through Chatham Financial, the leading derivative advisory firm for commercial real estate. Lenders require rate caps on floating-rate bridge and construction loans to ensure borrowers can service debt even if benchmark rates rise significantly. The cap guarantees that the all-in rate never exceeds the strike rate, protecting both the borrower and the lender's collateral.
How much does an interest rate cap cost?
Rate cap premiums depend on notional amount, strike rate, term length, current interest rate levels, and implied volatility. In a low-rate environment, a 2-year cap might cost 0.5%–1.0% of the loan. In 2022–2023, with rates rising rapidly, the same cap cost 3%–6% or more. Use this calculator to estimate your cost, then get firm quotes from Chatham Financial, Derivative Logic, or a bank treasury desk.
What is the difference between a rate cap and a rate swap?
A rate cap gives the buyer one-sided protection — you pay a premium upfront and benefit when rates rise above the strike, but you keep the benefit when rates fall below the strike. A rate swap converts your floating rate to a fixed rate in both directions — you eliminate rate risk but also lose the benefit of falling rates. Caps are more common for shorter-term CRE bridge loans; swaps are common for long-term permanent financing.
What strike rate should I choose for my rate cap?
Your lender typically dictates the maximum strike rate allowed — commonly set so your DSCR (debt service coverage ratio) stays above 1.0x or 1.20x at the strike rate. Lower strike rates offer more protection but cost significantly more. Most borrowers balance cost vs. protection by choosing a strike 100–200 bps above the current index rate, unless the lender specifies otherwise.
Can I sell or assign my rate cap if I sell the property?
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. Work with Chatham Financial or your derivative advisor to properly assign or terminate the cap at closing.
How is SOFR different from LIBOR for rate cap calculations?
SOFR (Secured Overnight Financing Rate) replaced LIBOR as the primary floating-rate benchmark for US CRE loans after June 2023. SOFR is based on overnight Treasury repo transactions, making it more transparent and manipulation-resistant than LIBOR. For rate cap purposes, SOFR caps function identically to LIBOR caps — the only difference is the reference rate used. Most new CRE loan caps are now written on Term SOFR (1-month or 3-month).
What happens when my rate cap expires?
When your rate cap expires, your loan reverts to a fully floating rate with no ceiling. If your loan is still outstanding and the lender requires a cap, you must purchase a new cap (cap renewal or extension). Cap renewal costs can be significantly higher or lower than the original depending on rate levels and volatility at the time of renewal. Always underwrite cap renewal costs into your CRE deal proforma.
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