Interest Rate Cap Structure

A loan can have a fixed rate or an adjustable/variable rate.

The fixed rate remains constant through the life of the loan. You get a 30-year mortgage with a fixed rate of 5.5%. You pay 5.5% interest each and every year of that 30-year span. It doesn't move around at all, no matter what overall interest rates do.

An adjustable-rate loan has a floating interest rate. It moves around in response to changes in overall rates. Your 30-year mortgage might start at 5.5%, but it will re-adjust based on changes in overall rates. So it may stay at 5.5% for five years, before re-adjusting to 7.5%. The next readjustment brings it to 7%, but a few years later, it rises to 8%. The rate varies over time (or adjusts, depending on the term you like best).

The interest rate cap structure describes how these re-adjustments happen. It limits (or caps) how much the rate on an adjustable-rate loan can move at any one time. It also sets the time limit between adjustments.

So...you take out a 10-year variable rate loan starting at 6%. It's first adjustment happens after five years. There is a cap of two percentage points, meaning that it can only move up to 8% or down to 4% on that first adjustment. After that, the loan adjusts every year, with a cap of one percentage point each time. Those stipulations describe the interest rate cap structure for the loan.