CAPPED RATE

An interest rate that is allowed to fluctuate, but which cannot surpass a stated interest cap. For example, a 10-year loan may be issued to a borrower at 6%, but with a capped rate of 9%. The interest rate can thus fluctuate up and down, but can never go higher than the 9% capped rate. Capped rates are supposed to provide the borrower with a hybrid of a fixed and variable rate loan. The fixed part comes from the capped rate itself, while the variable part comes from the loan's ability to move up or down with market fluctuations.

If the variable rate on a similar loan goes above the capped rate, the capped rate loan holder gets the benefit of not having to pay the extra portion. While this is a benefit, capped rate loans can have higher interest rates than a traditional fixed rate loan.