Interest Rate Cap Timing

TNJed's picture
Rank: Chimp | 10

Is it best practice to initiate the purchase of an interest rate cap the day before closing or the day of closing? I have only arranged for the purchase on the day of closing but was told that there are "two schools of thought" on whether you should do the day before or the day after. Thanks in advance for any insight.

Comments (6)

Jan 15, 2020

i would advise that you purchase of an interest rate cap.

hope that helps.

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Jan 16, 2020

I have never purchased a cap/swap a day before closing. Depending on the banks attorney the two options are moments before closing/funding or moments after.

If its third party I've always done after, a dude from Chatham once told me the counter party doesn't want an unsecured swaps out there.

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Jan 16, 2020

I've seen someone lock half their spread a month before close. They thought they were very sophisticated. They thought the index (in this case the 10YR Swap) would go down, but the real estate credit spreads would blow out, but only was half convinced apparently.

Spreads ended up going down.... ha

Most Helpful
Jan 16, 2020

Yea you can do anything at any time, for a price. We were considering buying a forward for a swap 3 months out during a particularly tumultuous time in rate market but ultimately decided against it, it ended up working out in our favor.

At the end of the day most people don't do many derivatives far out because 1) what happens if the loan blows up and 2) most are smart enough to know we have no idea where rates are going in the next month, especially if your a RE guy who buys swaps only a few times a year. Its like guessing the stock market as a casual observer.

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Jan 16, 2020

On development deals this has always been a post-closing item in my experience. Normally run the process through Chatham a week or so after closing.

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Jan 18, 2020