What happens if the interest rate swap contract is cancelled?
If interest rates have fallen, then the contract is considered to be ‘out of the money,’ and the cost to unwind the contract is the market value loss, which is typically significantly less than a prepayment penalty on a traditional fixed rate loan. If interest rates have risen, then the contract is considered to be ‘in the money,’ and the owner of the contract may actually receive money for unwinding the interest rate swap. In this scenario, the borrower is actually paid for paying off the loan early. CHRIS RAMOS is corporate banking officer of Comerica’s Western Market. Reach him at chramos@comerica.com.