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Mechanics

At the start of each period, LIBOR is compared to the swap rate.

If LIBOR < the swap rate, client pays the rate differential to the bank.

If LIBOR > the swap rate, the bank pays the rate differential to the client.

Compensation paid in arrears as: Principal x Interest Rate Differential x Actual Days/360

Description

A swap is a separate, stand-alone agreement provided by the bank to hedge the risk of an increase to a variable rate index over the term of the transaction.

Features

  • Fixed Rate financing
  • Variable rate loan is converted to fixed with the swap
  • Reduces and/or eliminates interest rate risk
  • No upfront charges, (outside of loan fees)
  • Two charges on checking account statement
  • Monthly swap billing advice
  • Separate swap documentation (ISDA)
  • Choice of option to prepay without penalty

Benefits

  • More competitive pricing compared with fixed rate loans
  • Creative, flexible hedge solutions
  • Forward rate locks on construction loans
  • Customized principal payment schedules
  • Ability to lock the rate prior to closing
  • Option to blend closing costs into the rate
  • Refinance existing loans at lower rate (blend & extend)
  • Favorable prepayment terms (two-way prepayment)
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