In one sentence
A hedge limiting the interest rate on a floating-rate loan, required by lenders on transitional debt.
The longer version
A rate cap protects both borrower and lender from rising rates on a floating loan by capping the effective rate. Bridge and construction lenders typically require a cap, purchased at closing and often collaterally assigned.
The cap agreement, its term, strike, and assignment, is a closing item on floating-rate deals, and its replacement at extension is a servicing event.
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