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The Value of Interest Rate Swaps

With a possible federal funds rate increase on the horizon, many companies are looking for financing with a fixed interest rate. Many banks are reluctant to offer a fixed rate for five or ten years because of the interest rate risk associated with offering long-term fixed-rate loans. However, an interest rate swap contract can be negotiated in addition to the loan agreement that enables banks to give customers a fixed rate for a longer term.

An interest rate swap is an agreement between two parties where one agrees to pay a fixed rate of interest and the other agrees to pay a floating interest rate. With a fixed rate, the interest rate stays the same over the course of the loan, while floating interest rates increase or decrease with the rest of the market. A swap allows the bank to mitigate risk while meeting the customer’s need for extended rate consistency.

If rates increase in the near future, an interest rate swap might be a more favorable option, but they are not open to everyone. To qualify for an interest rate swap, borrowers must meet the minimum eligible contract participant requirements and other suitability requirements. If you think you might be a candidate for a swap, contact your Bank SNB banker today.