Are You Planning to Make a Deal on Variable Rate Mortgage? Consider Accounting For Interest Rate Swaps

Most of us do not know what an interest rate swap is and why we would need it. In a nutshell, an interest rate swap is a loan where you agree to pay less interest over a specified period of time in return for the interest being decreased. This decrease can be in the form of fees or penalties, which you agree to pay over the length of the loan. In effect, it is like paying off your mortgage loan with another company. Click here for more info

There are many advantages to an interest rate swap, but first things first. It can save you thousands of dollars by reducing the amount you pay in interest each month. If you have loans over five years (or more), they can account for as much as half of your interest savings. For those who have variable rate loans (also known as “spread” loans), it can save them even more. In essence, you can save money from interest rate swap tax treatment.

However, there are several disadvantages to interest rate swaps that you should be aware of before you sign on the dotted line. First, it can change your monthly cash flow considerably. While it is possible to reduce the payment in the short term, you will ultimately end up paying more in the long run because your interest rate will go up. In addition, there is the potential for significant tax implications to be incurred when you switch from a variable interest rate to a fixed interest rate. This is also why it is not advisable to consider this option unless you are absolutely certain that you can afford the lower monthly payment.

Another disadvantage is that if your variable rate mortgage were to increase in value, the interest rate on your borrowings will increase as well. Depending on the amount you borrow, this could result in a very large rise in your monthly payments, which can quickly overwhelm most people. You could be looking at huge increases in the length of time that you have to pay off your borrowings. You should be aware that even if your variable rate mortgage were to fall in value, you would still need to make the higher payments because your interest rate would still be above the rate on your borrowings.

It is important to remember that interest rate swaps are not ideal for people who are planning to sell their property. If you are planning to sell your home, you can use the interest rate swap as a means of ensuring that you get top dollar for your home. In order to determine whether you should switch to a low or variable rate mortgage, it is important that you compare it with your current interest rate. Although the interest rate on your new loan will probably be lower than what you are currently paying, it is imperative that you look at the bigger picture and base your decision on whether or not you will be able to make the monthly payments on time. If you were to switch to a lower interest rate and then find that you cannot keep up, you may be stuck in a situation where you are unable to sell your home.

Accounting for interest rate swap transactions correctly is an essential part of making sure that you understand what you are signing. Interest rate swap mortgages are designed to save you money, but they are also designed to leave you with higher monthly repayments. It is vital that you understand whether you will actually save money or if you are simply going to be paying out more each month. If you are planning to sell your home, you should consider switching your variable rate mortgage to a low rate loan so that you can lock in at a low rate.