What kind of benefit does interest rate hedging offer over fixed-rate loans?

Interest rate hedging products offer customers flexibility, portability, and typically an opportunity to minimize loan prepayment fees. An interest rate swap for example effectively turns a floating rate loan with variable payments into a fixed rate with fixed payments. The swap is separate from the loan and may be transferable to other debt. Since the basic loan structure is not changed, customers will typically not incur a prepayment fee on a floating rate loan, should they decide to pay the loan off early. A swap can allow you to fix the rate on your loan for a period less than the actual loan and for a portion of the loan principal. For example, the client may only want a fixed rate for three years of a 5-year loan, or hedge just $1 million of a $2 million loan. This type of flexibility is available with many interest rate hedging products. How long are interest rate hedges effective? In most cases, we match the swap to the maturity of the loan, so the customer pays a fixed rate ...  more