Refinancing vs. Hedging to Manage Cost of Capital—What’s Better?

In commercial real estate (CRE), managing your cost of capital is critical to maximizing returns, protecting cashflow, and maintaining flexibility in uncertain markets. Two of the most effective tools to achieve this are refinancing and interest rate hedging. While both strategies aim to reduce financial risk, they serve different purposes—and choosing the right one depends on your goals, timeline, and market outlook.

What’s the Difference Between Refinancing and Hedging?

Refinancing involves replacing an existing loan with a new one—potentially changing terms like interest rate, amortization, maturity date, and lender.

Hedging uses financial instruments like interest rate swaps or caps to manage exposure to rate fluctuations without replacing the underlying loan.

Each approach comes with its own tradeoffs, costs, and timing considerations.

When Refinancing Makes Sense

Refinancing is a powerful tool to optimize your capital structure, particularly when:

Market Rates Improve: Lock in at a lower rate to reduce long-term debt service costs.

Loan Terms Need to Change: Extend maturity, convert to interest-only, or align payments with a new business plan.

Unlocking Equity: Access trapped capital for renovations, investor returns, or acquisitions.

Triggering Promote or Restructuring Equity: Realign investor stakes or unlock sponsor promote when value has been created.

However, refinancing can involve fees, prepayment penalties, updated appraisals, and stricter underwriting—so timing and execution matter.

When Hedging Is the Better Move

Hedging is often the preferred choice when:

You Want to Keep the Existing Loan: Preserve favorable terms or avoid costs associated with refinancing.

Rates Are Volatile or Rising: Protect floating-rate loans from future rate increases.

You’re Planning to Refinance Later: Use a cap or swap to stabilize costs now while preparing for a future transaction.

Lenders Require It: Many floating-rate lenders mandate caps to manage interest rate risk and ensure debt service coverage ratio (DSCR) compliance.

Hedging lets you maintain flexibility while reducing near-term risk—but it requires expertise to structure correctly and ensure it aligns with your goals.

Side-by-Side Comparison: Refinancing vs. Hedging

Refinancing vs Hedging Comparison

Feature	Refinancing	Hedging (Cap or Swap)
Affects Loan Terms	Yes	No
Triggers New Underwriting	Yes	No
Changes Lender	Yes (potentially)	No
Upfront Costs	Moderate to High	Low to Moderate
Best For	Long-term optimization	Short- to medium-term protection
Flexibility	Lower (requires commitment)	Higher (can unwind or adjust)
DSCR Relief	Sometimes	Yes, if hedging floating debt

How to Decide Which Strategy Is Right for You

Making the right call comes down to your asset’s lifecycle, risk tolerance, capital goals, and the current market.

Ask yourself:

Are current rates expected to fall, rise, or remain flat over your hold period?

Is your current capital structure inhibiting performance or flexibility?

Do you anticipate a sale, recapitalization, or investor event soon?

Is protecting near-term cashflow more important than locking in long-term terms?

A debt advisor can model both options—comparing total debt service costs, equity impacts, and return outcomes.

Why CRE Owners and Operators Combine Both Strategies

In many cases, the best approach isn’t either-or—it’s both. For example:

Cap-then-Refinance: Use a cap to limit rate risk now, then refinance once market conditions improve.

Refinance + Swap: Lock in a new loan and pair it with a swap to stabilize debt service long-term.

Cap + Equity Restructure: Hedge short-term exposure while you renegotiate equity or prepare for a liquidity event.

Why Defease With Ease | Thirty Capital Is Your Strategic Partner

We specialize in helping CRE owners evaluate both refinancing and hedging strategies based on your unique goals. With over 25 years of structured finance and capital markets experience, we offer:

Scenario modeling to compare cost of capital strategies

Expert execution of swaps, caps, and refinancing transactions

Transparent advice to guide your short- and long-term decisions

Technology-enabled insights to help you see the full picture

Don’t let uncertainty stall your strategy. Contact our team today and discover the best approach to manage your cost of capital.

“We appreciated your patience as you explained very clearly each step of a highly technical process and made yourself available when we needed you to answer questions or provide information. Your efforts made the process seem flawless.”

“Thirty Capital Financial provides true turnkey service. We are a very hands-on client, and the group has met our expectations for process management, cost efficiency, and timing every time. Thirty Capital Financial provides an objective, expert service that helps us meet our transaction goals.”

“Your expertise was critical in making this transaction run smoothly from start to finish. Your knowledge and professionalism made this transaction seamless. You took what could be a complicated transaction and made it easy!”

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