The quick read: Choose the rate by the date you expect to repay the loan, not by a forecast. A floating rate fits a bridge or value-add plan that exits through a sale or refinance, provided the property still covers its debt at the capped rate the lender tests. A fixed rate fits a stabilized hold you will keep to maturity, because its prepayment terms are the price of that certainty. On FRED's October 16, 2026 prints, SOFR was 3.88% against a 4.89% 5-year Treasury, so floating starts cheaper, but the cap premium, the escrow for a replacement cap and the stress test decide whether that gap survives.
What does a floating rate actually expose you to on a commercial loan?
A floating rate exposes you to an index plus a fixed spread that resets with the market, and nothing stops the index from rising unless you buy an interest rate cap, so your payment, your coverage ratio and your refinance proceeds all move with a number you do not control.
Fannie Mae's Structured ARM chapter defines the loan's interest rate as the sum of the index, the guaranty fee, the servicing fee and the investor spread, and it uses the 30-day average SOFR as that index. Freddie Mac's floating-rate term sheet (dated 4/26) prices off the same 30-day average SOFR. Bridge and bank lenders write their own index and spread definitions, so read the note, not just the quote sheet.
The index can move in a single print. FRED's daily SOFR series shows 3.62% on September 16, 2026 and 3.85% on September 17, 2026, a 23-basis-point step overnight, and every print from then through October 19, 2026 sat between 3.85% and 3.90%. Here is the dated tape:
SOFR (FRED, observation Oct 19, 2026): 3.87% SOFR (FRED, observation Oct 16, 2026): 3.88% 5-year Treasury constant maturity (FRED, Oct 16, 2026): 4.89% 10-year Treasury constant maturity (FRED, Oct 16, 2026): 5.09% SOFR one year earlier (FRED, Oct 16, 2025): 4.30% 5-year Treasury one year earlier (FRED, Oct 16, 2025): 3.55% 10-year Treasury one year earlier (FRED, Oct 16, 2025): 3.99%
The relationship flipped. A year earlier SOFR sat 75 basis points above the 5-year Treasury; on October 16, 2026 it sat 101 basis points below it. That is why floating quotes look cheaper today. A fixed rate is anchored to Treasuries instead: Fannie Mae's guide defines its Index as the basis for an ARM loan's note rate or for a Treasury lock on a fixed-rate loan. For current published loan levels by product, see the rates page.
How do lenders test DSCR on a floating-rate loan at a stressed rate?
Agency lenders test a floating loan at its capped rate and also against a fixed-rate equivalent, and size to the lower result: Freddie Mac's K-Deal presentation (as of June 30, 2026) sets a 1.15x minimum DSCR on the maximum capped interest rate for floating loans, against 1.25x for fixed, so the strike you buy can decide your proceeds.
The same presentation says Freddie Mac's floating-rate mortgages are sized using a fixed rate equivalent. Fannie Mae's Structured ARM chapter caps the loan at the lesser of the amount that meets the minimum DSCR at the Maximum Note Rate, which it defines as the minimum cap strike plus the loan margin, the amount under a separate Fixed Rate Test, and the maximum LTV. Its cap-strike section adds a ceiling: the strike plus the guaranty fee, servicing fee and investor spread must not exceed the rate that produces the minimum required DSCR. In plain terms, the lender asks whether the property still pays its debt if the index climbs all the way to the strike, and whether the same loan would pass as a fixed-rate loan.
An illustrative example with hypothetical figures, not a quote or any program's formula: a property with $1,000,000 of net operating income and a $12,000,000 interest-only floating loan at a 3.00% spread.
Coupon at the Oct 19, 2026 SOFR of 3.87%: 6.87% Annual interest at that coupon: $824,400 Interest-only DSCR at that coupon: 1.21x Coupon if SOFR reaches a 5.00% cap strike: 8.00% Annual interest at the strike: $960,000 Interest-only DSCR at the strike: 1.04x
Agency programs generally run that coverage test on an amortizing payment, even when the loan pays interest only. Freddie Mac's floating-rate term sheet says the DCR for partial-term and full-term interest-only periods uses an amortizing payment, and Fannie Mae's cap-strike section uses a debt service constant that includes amortization unless the approved interest-only term is at least as long as the initial cap term. Carry the same hypothetical through that test:
Annual debt constant at 8.00% on a 30-year amortizing payment: about 8.805% Loan that meets a 1.15x test on that constant: about $9.88 million
Three levers close that $2.1 million shortfall: a lower strike, which costs more premium; more equity; or a fixed-rate structure with its own coverage test. A bridge or bank lender writes its own stressed-rate covenant, so ask which rate and which payment the coverage test uses before you compare two quotes, and run both payments through the amortization schedule calculator.
When does a lender require an interest rate cap, and what drives its cost?
Agency floating-rate programs generally require a purchased interest rate cap, and a bridge lender may write one into its term sheet, because the cap pays the borrower whenever the index rises above the strike; the premium rises with a lower strike, a larger notional, a longer term and a higher forward curve.
Fannie Mae's Interest Rate Caps section (1105) spells out the terms. The borrower buys a third-party cap from an approved provider, keeps a cap in place continually until a permitted fixed-rate conversion or maturity, holds a minimum cap term of 5 years, and sets the notional equal to the original principal of the loan for the whole cap term. Freddie Mac's K-Deal presentation says its floating-rate mortgages generally require a third-party SOFR cap. The four inputs that set the premium:
Strike: the index level at which the provider starts paying; a lower strike protects more and costs more Notional: the balance the cap covers; Fannie Mae requires the original loan principal Term: the period covered; Fannie Mae's minimum is 5 years, and a cap shorter than the loan needs a replacement Forward curve: the market's expected path of SOFR over the cap term
The forward curve can dominate the other three. Commercial Observer reported on March 7, 2023, citing a hedging advisor's data, that a two-year cap on a $25 million loan at a 4 percent strike cost $569,000, against $97,000 a year earlier. The article attributes the jump to changes in the SOFR forward curve. That is a dated illustration, not a current price, so get a live bid before you budget.
The replacement cap is the cost borrowers miss. When the cap expires before the loan, the lender collects cash now for the next one. Fannie Mae's section 1105.03 requires the borrower to fully fund that reserve at origination and escrow at least 110% of the current replacement cap cost. Freddie Mac's K-Deal presentation says replacement cap funds are generally escrowed at 125% of replacement cost and recalculated on a semi-annual basis. Carry that escrow in the sources and uses beside the premium.
What does a fixed rate cost you in prepayment flexibility?
A fixed rate removes index risk for the whole term, but the lender protects the yield it locked, so leaving early costs money: Freddie Mac's K-Deal presentation lists defeasance or a yield maintenance premium of at least 1% for fixed-rate loans, while its floating-rate term sheet offers a first-year lockout followed by 1%.
The mechanics of each form, and how to model them against a planned exit, are in our guide to how commercial loan prepayment penalties work. A premium designed to maintain the lender's original yield is largest when market rates sit well below your coupon, which is exactly when a refinance looks most attractive. A fixed rate protects you from rising rates and charges you for falling ones if you leave.
Floating is more flexible, not free. Freddie Mac's floating-rate term sheet offers four prepayment options, from a first-year lockout followed by 1% through a 7%-to-1% step-down on its 10-year capped loan, each with no premium in the final 90 days. Fannie Mae's Structured ARM locks out the first loan year and then charges either a declining schedule of 4%, 3%, 2% and 1% on a 5-year term or a flat 1%. Read the schedule against your sale date, not against the loan's maturity.
How do your hold period and exit decide fixed or floating?
Your hold period and exit decide the rate because each structure charges for a different risk: a capped floating loan charges for protection while you reposition and then lets you repay at a sale or refinance, and a fixed loan charges for leaving early, so match the cheap exit window to the date you plan to leave.
Fixed or floating by hold plan (YieldStack editorial guide; each lender sets its own terms):
| Your hold plan | Usual answer | What protects you | What it costs |
|---|---|---|---|
| Your hold plan Bridge: lease-up or repositioning, then sale or refinance | Usual answer Floating with a purchased cap | What protects you A cap at a strike the business plan can carry | What it costs Cap premium, replacement-cap escrow, coverage tested at the strike |
| Your hold plan Value-add: renovation, then refinance to permanent debt | Usual answer Floating with a cap, or a swap or collar if the lender allows | What protects you A hedge sized to the renovation period | What it costs Cap premium, a sold floor on a collar, or swap breakage after rates fall |
| Your hold plan Stabilized hold kept to maturity | Usual answer Fixed | What protects you A locked coupon for the whole term | What it costs Yield maintenance or defeasance if you leave early |
| Your hold plan Stabilized, but a sale is likely before a fixed term ends | Usual answer Floating with a cap and a lockout-then-1% option | What protects you A cap through the planned sale date | What it costs Index risk up to the strike, the premium, and 1% at payoff |
A bridge loan is the clearest case. The plan is to repay it, so a fixed coupon with yield maintenance would charge you at the very exit you are planning for. Budget the cap premium as part of the bridge's carry, because it is the cost that protects the exit.
A stabilized hold is a closer call than it looks. Freddie Mac's floating term sheet offers 5-, 7- and 10-year terms, and Fannie Mae's Structured ARM runs 5 to 10 years, so agency floating debt can run as long as a fixed loan. The question for a long hold is whether you would rather pay for a cap and its replacement escrow or for prepayment certainty you may never use.
What changes if you use a swap or a collar instead of a cap?
A swap turns a floating loan into a synthetic fixed rate and a collar trades away your upside below a floor to cheapen the cap, so both lower or remove the upfront premium, but a swap can charge a breakage payment on early payoff when rates have fallen since you signed.
CFI's swap explainer describes a swap as an exchange of fixed-rate payments for floating-rate payments on a notional principal that is never exchanged, with SOFR now the most widely used U.S. dollar benchmark. The borrower pays fixed to the swap counterparty and receives floating, and that floating receipt offsets the loan's floating coupon.
The cost sits at the exit. The Federal Reserve's Trading and Capital-Markets Activities Manual says a rise in market rates raises the value of a swap to the fixed-rate payer, and that ending a swap early usually means a payment based on its mark-to-market value: the remaining swap cash flows discounted at the rates prevailing at termination, an amount that is either received or paid. In the manual's example, a party paying 10 percent fixed on $10 million notional with one year left, when one-year rates are 8 percent, would be required to pay $185,000 to terminate the swap. If a sale pays off your loan and the swap is ended with it, the swap behaves like yield maintenance written outside the loan: sell after rates fall and you write a second check; sell after rates rise and the same settlement can pay you.
A collar works differently. CFI's collar explainer describes buying a cap and selling a floor, with the floor's premium designed to match the cap so the collar can be close to zero cost upfront. The trade-off is that you give up the benefit of rates falling below the floor. Before you price either, ask whether the lender's documents accept a swap or collar in place of the required cap.
How do you get a fixed or floating commercial loan placed with the right lender?
Start with a commercial mortgage brokerage that asks lenders to quote fixed and floating terms on the same file, because a cheaper coupon only matters after the cap, the escrow and the prepayment terms are priced. YieldStack is an AI-native commercial mortgage brokerage that arranges financing for commercial real estate investors. Submit the deal here.
YieldStack publishes this guide, and the order below is our editorial view, based on one criterion: which route lets you compare both structures, fully costed, before you commit.
- YieldStack: our top pick for AI-native commercial mortgage brokerage on a fixed-versus-floating decision. Your file is compared across 20,000+ loan programs, so floating bridge, agency floating and fixed-rate permanent programs can be weighed on one submission. Human brokers structure the request, ask for both rate structures, and negotiate the cap terms and prepayment schedule on your side. It is a 5-minute submit. The result is a median first offer in under an hour, from an institutional lender. It costs Zero upfront to submit a deal and review offers; YieldStack's broker fee is 0.50–1.00% of the loan amount and is paid only at closing. Every credit decision is made by the lender; YieldStack arranges the introductions and negotiates on the borrower's side, and no loan, rate, or closing is guaranteed.
- Going direct to one lender. A bank, agency or bridge lender quotes the structure its own program offers. That works when you already know the product you want; the trade-off is one cap requirement, one prepayment schedule and one stress test to compare against nothing.
- A hedging advisor. An advisor prices and executes the cap, swap or collar once a loan is chosen. It is useful for the hedge itself, but it does not place the loan.
The bottom line
Decide fixed or floating by the date you plan to repay. Floating with a cap fits a bridge or value-add plan whose exit is a sale or refinance, as long as the property still covers its debt at the strike. Fixed fits a stabilized hold you will keep, because its prepayment cost lands only if you leave early. On October 16, 2026, SOFR at 3.88% sat 101 basis points under the 5-year Treasury at 4.89%. Price the cap, the replacement escrow and the prepayment schedule before you treat that gap as savings.