Glossary

Interest Rate Swap

A derivative contract in which two parties exchange interest payment streams on a common notional amount — typically a floating-rate CRE borrower paying a fixed rate to a swap counterparty in exchange for receiving a floating rate matching its loan index — effectively converting floating-rate loan exposure into a fixed effective rate.

In CRE finance, borrowers with floating-rate loans use swaps to hedge interest rate risk without refinancing: the borrower continues paying its lender the contractual floating rate, but simultaneously pays fixed and receives floating on the swap, so the two floating legs largely offset and the borrower's effective all-in cost becomes the fixed swap rate plus the loan's credit spread. Swaps are marked to market daily and can have significant positive or negative value to the borrower depending on how rates have moved since inception — a swap with negative value can create a substantial breakage cost if the borrower wants to unwind it early (e.g., upon a sale or refinancing), functioning similarly in economic effect to a yield maintenance prepayment penalty. Unlike a rate cap, a swap eliminates upside benefit from falling rates along with downside protection from rising rates, making it a pure hedge rather than an option-based, premium-cost protection.