What is a SWAP and why might a borrower consider using one?

Unlike a residential mortgage loan, commercial lenders are generally unwilling to provide fixed interest rates for periods of 15 years of longer. Commercial interest rates typically adjust at least every five years based on an external index plus a margin or spread. As an alternative, a SWAP is a mechanism for exchanging a variable interest rate for a long-term fixed interest rate. SWAPs are sophisticated financial derivatives that may involve breakage fees if terminated before their maturities. Before entering into a SWAP, a borrower should understand and thoroughly weigh their advantages and disadvantages.

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