Interest Rate Ceiling

Interest rate ceilings are applied differently depending on the investments involved. Regardless of the industry or investment, the concept is basically the same: With respect to the real estate industry, an interest rate ceiling, commonly referred to as interest rate caps or simply rate caps, is the basic terminology that refers to the maximum rate of interest that can be applied to an adjustable rate mortgage, loan or lender. These rates are applied based on the terms of the contract between the lender and the borrower. For example, if a borrower secures an adjustable rate loan with a lender, and the contract details an interest rate cap of 1.5 percent, the annual interest rate on that loan cannot increase beyond 1.5 percent each year for the life of the loan unless a lifetime interest rate ceiling is incorporated into the loan contract. In this case, the contract might include a clause for an annual interest rate ceiling of about 1.5 percent and a lifetime interest rate cap of 11 percent. Under these circumstances, the rat cap can apply annually as per the contract terms; however, it is not to exceed the amount of the lifetime interest rate ceiling, which is the maximum rate of interest that will remain for the duration of the loan.