A multifamily rate cap strike generally excludes the loan’s contractual spread. With matching coverage, a 3.00% strike plus a 2.75% spread can produce net interest equivalent to 5.75% while the cap is active and pays as agreed. The premium and other borrowing costs remain additional. Bank of Ireland’s July 2024 explanation explicitly separates the cap from the loan margin.

Why the cap strike and loan rate differ

For a straightforward floating-rate loan, the contractual interest rate, or coupon, is the reference rate plus the contractual spread, subject to provisions such as a rate floor. The spread is the lender’s pricing addition. A separate cap supplies an offsetting payment without changing that coupon, as illustrated in the Federal Reserve’s explanation of cap mechanics.

Fannie Mae’s SARM guidance, effective June 2, 2026, adds guaranty fee, servicing fee and investor spread to the strike in its underwriting test. Fannie Mae, Section 1105.02 When comparing terms for multifamily investment and financing, establish which components are already included in the stated margin before adding anything.

Calculate a SOFR cap payout

For the plain cap assumed here, with payment settled after the interest period:

Cap payment = cap notional × max(reference rate − strike, 0) × accrual fraction.

The notional is the contractual dollar amount used in the calculation. The accrual fraction converts an annual rate into the covered portion of a year. Bank of Ireland’s worked calculation illustrates this mechanism.

A hypothetical apartment loan

Assume the following hypothetical contract terms, independent of any agency program. The rates are illustrative, not market quotes.

Assume no rate floor, benchmark adjustment or other mismatch, and full payment by the cap provider. Exclude the premium and other fees from this interest-only calculation.

The loan coupon is 5.00% + 2.75% = 7.75%. The cap covers the two percentage points by which the reference rate exceeds the strike:

The net amount equals $12 million × 5.75% × 30/360. The contractual loan coupon remains 7.75%; 5.75% describes the interest result after the cap receipt, on the same day-count basis. It is not an APR or a measure of all financing costs.

If the reference rate instead fixes at 2.00%, the cap pays zero and the loan coupon is 4.75% under these assumptions. The owner retains the benefit of falling rates.

Actual/360 is an explicit assumption here. The ARRC’s business-loan conventions, released July 21, 2021, recommend it while recognizing other day-count fractions.

What if cap notional differs from the loan balance?

Keep the $12 million loan but reduce cap notional to $9 million. At the same 5.00% fixing, the cap pays $15,000. Net interest becomes $62,500, equivalent to 6.25% on the assumed basis.

The remaining $3 million has no cap offset. Once the reference rate is above the strike, a further one-percentage-point rise adds $2,500 to net interest for a 30-day period. The strike alone therefore gives an incomplete picture of protection; the notional schedule matters too.

The reverse mismatch also matters: principal can decline while cap notional remains unchanged. Fannie Mae specifically requires its initial SARM cap’s notional to equal original loan principal throughout that cap’s term. Fannie Mae, Section 1105.01

For an amortizing loan, compare the projected outstanding balance and contractual cap notional period by period. Use the amount specified in the cap documents in the payout formula; do not assume it equals the outstanding loan balance.

Can payment timing create a temporary cash need?

In the hypothetical example, suppose loan interest is due October 1, but the $20,000 cap receipt becomes available October 5. Assume the servicer requires the full loan payment first. The owner must fund $77,500 on October 1, despite eventual net interest of $57,500.

Payment routing matters too. Fannie Mae’s SARM guidance directs cap payments to the lender and conditions borrower disbursement on no loan default and receipt of that month’s required note payments. The hypothetical October 5 receipt is not a Fannie Mae convention. Fannie Mae, Section 1105.04

Confirm who receives the payment, when it becomes available, and whether the servicer credits it against the amount due. A rental financing and cash-flow model should show gross interest and cap receipts separately.

What exposure remains while the cap is active?

Both contracts can reference “SOFR” without matching. One-month Term SOFR and 30-Day Average SOFR reflect different periods and methodologies. Compare the exact benchmark, observation date, reset schedule, accrual period and day-count basis in both contracts. A mismatch can leave interest that the cap payment does not offset. The ARRC conventions explain the distinction between Term SOFR and SOFR Averages.

A loan floor can limit savings when rates fall. The cap also leaves the borrower exposed to its provider’s failure to perform. Premium, margin and other costs remain outside the basic payout calculation. Bank of Ireland’s cap disclosure identifies these limitations.

What changes at cap expiration?

In the example, cap coverage ends October 1, 2027, two years before loan maturity. Without replacement protection or a change in financing, subsequent periods have no cap offset. At the assumed 5.00% reference rate, another 30-day period would cost $77,500 in interest.

Check the final covered accrual period separately from its settlement date. A payment received after coverage ends can relate to an earlier covered period; it does not establish protection for the next one.

The cap does not resolve the maturity repayment problem. Freddie Mac’s 2025 Form 10-K, dated February 12, 2026, explains that most multifamily loans require balloon payments and that adverse markets can prevent refinancing.

Before accepting the financing, have counsel and a qualified hedging adviser reconcile the loan documents, cap confirmation and servicing instructions. Then test how debt service affects coverage using both the covered periods and the exposure remaining after expiration.