Rate cap protects borrowers from interest rate increases between loan application and approval. It’s commonly used in mortgages and allows for floatdowns if rates drop. Its availability varies by jurisdiction, so borrowers should check if their rates are protected and use it to their advantage.
Rate cap is a type of provision found in most types of loan agreements. The protection helps ensure that the borrower is protected from a rate increase during the period between the loan application submission and the loan approval and closing. Sometimes known as a loan freeze, this approach makes it easier to get the best possible rate on your loan, even if there is currently a fair amount of fluctuation in terms of interest rates in the market.
One of the most common examples of how to best use rate protection is found in applying for a mortgage. Assuming an applicant wants to buy a home and has been offered an interest rate close to the current average fixed rate for that geographic area, the presence of rate protection means that even if that average rate were to increase while mortgage demand is under consideration, the lender will still extend that lower rate to the applicant if and when the mortgage application is approved. As a bonus, most rate protection clauses also allow for so-called floatdowns, which means that if the average rate drops below the quoted rate, the lender can approve the loan at that lower rate.
The rate protection structure actually allows the loan applicant to be sure that they are receiving an acceptable rate of interest. In the worst case scenario, the rate on the approved loan will be the one applied on the application submission date. At best, the lender will approve the loan and extend an even lower rate to the borrower, making the loan an even better proposition for the borrower.
It is important to note that the laws and regulations relating to the tariff protection structure vary from one jurisdiction to another. In some areas, the inclusion of this type of provision is mandatory, while other areas consider the fare protection optional. Because this type of arrangement can mean the difference between locking in an attractive rate or losing that rate pending loan approval, consumers should take the time to determine whether their rates are protected. Take the time to identify lenders who make this type of protection available as part of their standard process for accepting and processing loan applications, and use it to your advantage to match your application submission with a rate acceptable.
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