Interest Rate Cap Costs Are Surging Again
By Todd Ragimov, DC Interest rate caps, a financial tool used to manage interest rate risk, are experiencing a surge in costs once again. This resurgence in cap costs has significant implications for borrowers, lenders, and investors alike, reshaping strategies and risk management approaches in the financial markets. Understanding the factors driving this trend is crucial for navigating the complexities of interest rate risk in today's economic environment. The Role of Interest Rate Caps Interest rate caps are derivative contracts that protect borrowers from rising interest rates by capping the maximum interest rate they will pay on a loan. These caps are often used in conjunction with variable-rate loans, such as adjustable-rate mortgages (ARMs) and commercial real estate (CRE) loans, to provide stability and predictability in interest payments. For example, a borrower with an ARM may purchase an interest rate cap that limits their interest rate to a certain level, regardl...