Interest Rate Swap

An interest rate swap is a financial contract in which two parties agree to exchange one stream of interest payments for another, over a set period. Typically, this involves swapping fixed-rate loan payments for variable-rate payments, or vice versa. This can be used by real estate investors to manage interest rate risks, particularly in scenarios where they might have a loan with a variable interest rate but prefer the predictability of fixed payments.

Modeling a swap from a real estate financial modeling perspective is similar to modeling a fixed rate mortgage, with the possible inclusion of a) a rate buydown where the borrower pays a premium to secure a rate swap that is below par and b) a swap term that may (or may not) be co-terminous with the mortgage loan term.

---

Click here to get this CRE Glossary in an eBook (PDF) format.