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Swap Invoice Explanation

Swap invoices frequently cause confusion as they are billed separately from the loan.

 

Interest Rate Assumptions

LIBOR                         2.00%

Loan Spread               2.00%

Floating Rate Today  4.00%

 

Swap Rate                   2.50%

Loan Spread            2.00%

Fixed Rate                  4.50%

 

Swap Invoices Explained – CPA’s

Borrower Pays

Borrower pays on loan  4.00%

Borrower pays on swap 4.50%

Total                                  8.50%

 

Borrower Receives

Borrower receives on swap  4.00%

Total                                         4.00%

 

The borrower’s effective fixed rate is therefore 8.50% – 4.00% = 4.50%.  This matches the swap rate quoted above.

Now, let’s assume LIBOR is at 6.00%.

 

Borrower Pays

Borrower pays on loan  8.00%

Borrower pays on swap 4.50%

Total                                12.50%

 

Borrower Receives

Borrower receives on swap  8.00%

Total                                        8.00%

 

The borrower’s effective fixed rate is therefore 12.50% – 8.00% = 4.50%.  This matches the swap rate quoted above.

 

Swap Invoices Explained – Borrowers

 

Loan Payment

Borrower pays2.00% + 2.00% = 4.00%

 

Swap Payment

Borrower pays        2.50% + 2.00% = 4.50%

Borrower receives 2.00% + 2.00% = 4.00%

Borrower Net Pays                                0.50%

 

Add the two invoices together to determine the effective interest rate.

The effective rate is therefore 4.00% + 0.50% = 4.50%.  This matches the swap rate above.

 

Now, let’s assume LIBOR is at 6.00%.

Loan Payment

Borrower pays             6.00% + 2.00% = 8.00%

 

Swap Payment

Borrower pays        2.50% + 2.00% = 4.50%

Borrower receives 6.00% + 2.00% = 8.00%

Borrower Net Receives                         3.50%

 

The effective rate is 8.00% – 3.50% = 4.50%

 

Sample Payment Invoices with Principal – Mechanics

Assume a $25mm loan with monthly principal of $33,000 in a month with 30 days.

Interest Rate Assumptions

Floating Rate   4.00%

Floating interest payment will be $25,000,000 * 4.00% * 30/360 = $83,333.33.

Swap rate locked was 4.50%

Fixed interest payment will be $25,000,000 * 4.50% * 30/360 = $93,750.

Principal of $33,000 per the Note.

With a traditional fixed rate loan of 4.50%, the monthly P&I payment should be $126,671.33 as follows:

Principal  $ 32,921.33

Interest    $ 93,750.00

Total         $126,671.33

 

How the actual mechanics will work:

Loan Invoice

Principal              $ 32,921.33

Interest                $ 83,333.33

Borrower Pays   $116,254.66

 

Swap Invoice

Borrower pays          $93,750.00

Borrower receives    $83,333.33

Borrower Net Pays  $10,416.67

 

Add the two invoices together to determine the total payment.

The total payment is $116,254.66 + $10,416.67 = $126,671.33.  This matches the payment from above in the traditional fixed rate loan scenario.

 

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