What Is A Good Rate Cap In Real Estate? Our Real Estate Expert Explains

Something you need to know about an adjustable-rate mortgage (ARM) is that you might get a favorable interest rate in the beginning, but it's subject to change down the line. As a result, you need to think about your financial stability and projected growth for the future to determine if you'll be able to keep up payments if interest rates go up. Having a good rate cap helps relieve some of this uncertainty. Dutch Mendenhall, CEO and co-founder of RADD Companies, spoke exclusively to House Digest about navigating this aspect of a loan agreement. He said a good rate cap is a low one. "Lower rate caps mean tighter protection against soaring rates."

He started off by explaining what exactly a rate cap is. "A 'rate cap' in real estate sets the maximum limit on how much your ARM can increase or decrease. It's a crucial safeguard because it shields you from drastic interest rate hikes that could blow up your mortgage payments."

What makes a good rate cap

It makes sense that a potential homebuyer should seek a lower rate cap since it provides security against the constant interest rate hikes that keep impacting the housing market. However, Dutch Mendenhall said there's more to it. "Lower rate caps mean tighter protection against soaring rates, but they might come with a trade-off — a higher initial interest rate. It's like walking a fine line between security and cost."

If you're wondering whether a bad rate cap can be adjusted to a good one down the road, the answer is no, but there's a way around it. "You can't directly tweak a lousy rate cap on your existing loan," Mendenhall told House Digest. "However, if your credit improves or market conditions shift, you might snag a better rate cap by refinancing it into a new loan. It's a strategic move that could save you a heap of cash in the long haul."

More advice on rate caps

Dutch Mendenhall also offered advice to House Digest readers about looking at the full picture. "When diving into rate caps, don't just focus on the numbers. Pay attention to the initial rate, margin, and adjustment frequency package. You've got to think ahead, anticipate those interest rate rollercoasters, and make sure your loan terms match your financial game plan.

‌"Remember, having solid credit is like holding the trump card. It puts you in the driver's seat to negotiate killer rates and keep those pesky debts in check. So, keep your credit sharp, play your cards right, and watch those interest rates fall in line." Buying a house with poor credit is a difficult route that subjects you to higher payments and rates and loans with less favorable conditions. Taking the time and putting in the work to boost your credit will be even more impactful than snagging a good cap rate.