A Cap by definition means “ the highest interest rate that can be paid on floating-rate bonds, or the highest rate that an adjustable rate mortgage can rise to in a specified period of time” (www.investorwords.com/692/cap.html). Why purchase a cap? You can use the benefit of a low interest rate of an adjustable rate loan with the security of knowing your interest rate will not go higher than where the cap is set. It’s inevitable that as the economy improves, interest rates will rise. To protect your low interest rate adjustable loan without the concern of the loan becoming unaffordable, purchasing a cap for your bond is a smart tool to use to ensure costs are controlled. Other benefits of caps are that they do not have any pre-payment penalties to exit early and in most cases, they can be sold back to the bank if you chose to exit the cap early.

The bank benefits from clients purchasing caps because they can charge a one time upfront fee to the client. This fee can be financed with tax-exempt proceeds. Western Solutions is able to negotiate cap fees with banks on behalf of our clients; ensuring banks are not charging any hidden fees while keeping cost of issuance minimal.

Ultimately, caps are a handy derivative product that can result in a much cheaper loan than a fixed rate option.

On different note, we would like to wish all of our school clients a happy, successful start to the new school year!