Many churches have long-term debts, such as a mortgage, that have variable interest rates associated with them. There is much uncertainty that comes along with paying variable interest rates on large amounts of debt over 20 to 30 year periods. Entering into an interest rate swap is an option available to churches that can help reduce this uncertainty. Although the term "interest rate swap" may sound intimidating on the surface, they really work quite simply.
For example, a church has a 20 year mortgage in the amount of $2 million. The mortgage has an interest rate of prime plus 1%. The church is uncomfortable paying a variable rate on $2 million so they enter into an interest rate swap agreement to effectively fix the rate at 6%. Big picture, the church would continue to pay their mortgage payment at the variable rate. The swap counter-party would reimburse the church for the amount of variable interest paid in exchange for the church paying the swap counter-party a fixed rate of 6%. So, effectively, the church is able to pay a fixed rate of 6% throughout the life of the interest rate swap agreement.
There could be a price to pay for eliminating this uncertainty. Using the example above, at times when the variable rate is less than 6%, the church would be paying more interest than they would had they not entered into a swap agreement. On the flip side, then the variable rate rises above 6%, the church would be saving money.
Of course there is no way to predict which direction that rates will go (unless you have a crystal ball!!). However, from a budgeting standpoint, a fixed interest rate can be more attractive then a variable rate. It could also protect against unexpected increases in mortgage payments if interest rates were to rise dramatically.
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