Interest Rate Swap or Interest Rate Cap…
Which is Right for You?
Swaps and Caps Eliminate Interest Rate Risk for Borrowers
Minimize Rate Risk…Lower Interest Cost
Interest rate swaps and caps help borrowers with variable rate loans protect against unknown future rates and possibly lower your interest costs. With DerivGroup as your independent advisor, you’ll get expert guidance on which is the the most effective solution for you.
Interest Rate Swaps vs. Caps: What’s the Difference?
- Interest Rate Swap – Converts your variable rate to fixed rate.
- Interest Rate Cap – Limits your variable to a maximum rate.
Both products limit interest rate risk. The right choice depends on your objectives and market outlook. DerivGroup helps you make that decision with confidence.
What is an Interest Rate Swap?
A Swap converts your variable rate loan into a fixed rate
A swap is a financial contract separate from your loan that you obtain from a bank. You choose the percent of your variable rate loan you want to swap, and for how long, and then agree to a fixed rate.
Each month your variable loan rate is compared to fixed rate of the swap. If the loan rate rises above the fixed swap rate, the bank reimburses you the amount your loan rate is above the swap rate. If the loan rate is below the fixed swap rate, the bank charges you this difference.
Therefore, no matter whether your loan rate goes up, or down, the payments from the swap will always adjust your loan rate to the fixed swap rate… effectively converting your variable rate loan into fixed rate.
What is an Interest Rate Cap?
An interest rate cap sets a maximum rate for your loan
Like a swap, an interest rate cap is a separate financial contract you purchase from a bank or dealer. Think of a cap as interest rate insurance. You choose the cap rate, and if the rate on your loan ever goes above the this rate, the bank reimburses you for this interest amount above the cap rate. If rates stay low or decline, you get the benefit of the lower rate.
How to choose a Swap vs a Cap?
Caps can be more cost effective than swaps, especially when interest rates are declining. They give you protection without but don’t lock in your rate. Banks will typically recommend a swap because a swap is more profitable. DerivGroup can help you determine whether a cap or a swap is the right product for your needs.
Why DerivGroup?
As your independent advisor, DerivGroup works for you…not the bank.  We negotiate the best terms for you by having the same market information as the bank. We help you minimize your interest rate risk and optimize your financing strategy.
Interest Rate Cap vs. Swap: Which Fits Your Strategy?
