Chatham Rate Cap Calculator
Estimate your interest rate cap cost, maximum monthly payment, and floating rate loan scenarios with SOFR-based calculations.
What is an Interest Rate Cap?
An interest rate cap is a financial derivative that protects borrowers with floating rate loans from rising interest rates. The borrower pays an upfront premium to a cap provider (like Chatham Financial or a bank), and in return, if the floating index rate rises above the strike rate, the cap seller compensates the borrower for the difference.
How a Rate Cap Works
Cap payment = (Index Rate − Strike Rate) × Notional × Period
Example: $5M loan, strike 7%, index rises to 8%
Cap pays: (8% − 7%) × $5,000,000 ÷ 12 = $4,167/month
Key Components
- Notional Amount — the loan balance the cap is written against.
- Strike Rate — the index rate above which the cap pays. Lenders often require 2%–3% above the current index.
- Index — the floating benchmark (SOFR replaced LIBOR in 2023 for most US loans).
- Credit Spread — your lender's margin added to the index (your all-in rate = Index + Spread).
- Cap Term — how long the protection lasts (must match or exceed the loan term or interest-only period).
- Premium — the upfront cost paid to purchase the cap.
What is Chatham Financial?
Chatham Financial is one of the largest independent financial risk management advisory firms in the US. They specialize in interest rate hedging, cap and swap transactions for commercial real estate borrowers, and are widely used by real estate private equity firms, developers, and lenders. Their rate cap calculator and advisory services help borrowers understand and purchase appropriate rate protection.
SOFR Rate Cap vs LIBOR
Since June 2023, SOFR (Secured Overnight Financing Rate) has replaced LIBOR as the dominant floating rate benchmark for US commercial loans. SOFR is published daily by the Federal Reserve Bank of New York and is considered more robust and less susceptible to manipulation than LIBOR.
| Rate Cap Term | Typical Premium Range | Best For |
|---|---|---|
| 1 Year | 0.5% – 2.0% of notional | Short bridge loans |
| 2 Years | 1.0% – 3.5% of notional | Value-add CRE loans |
| 3 Years | 1.5% – 5.0% of notional | Construction loans |
| 5 Years | 2.0% – 7.0% of notional | Long-term floating |
Factors That Drive Cap Premium Cost
- In-the-money-ness — how far the strike is above the current index (lower strike = more expensive).
- Rate volatility — higher expected volatility increases cap premiums.
- Loan term — longer caps cost more due to greater uncertainty.
- Notional amount — premiums scale proportionally with loan size.
- Forward curve — market expectations of future rates significantly affect pricing.
When Do Lenders Require Rate Caps?
Most commercial real estate lenders require rate caps on floating rate loans, especially bridge loans and construction loans. The cap protects both the borrower and the lender by ensuring debt service coverage ratios remain adequate even if rates rise significantly.