Fixed or floating rate on a commercial mortgage

The index gap is smaller than it looks

A floating loan starts from a lower index, but you pay for three things a fixed loan does not charge you for. Floating spreads are usually wider because floating lenders take more credit risk. You buy a rate cap. And the lower index only lasts as long as short rates stay down.

Long rates are also above where many market participants expected. MBA’s February 2026 forecast: 4.2% average for 2026 (MBA forecast, February 2026)³. The actual 10-year reading: 4.94% (October 30, 2026). A borrower who floats today waiting for long rates to fall is making the same bet that forecast made earlier this year.

Worked deal: a $12 million apartment loan, fixed or floating

Illustration. A sponsor borrows $12,000,000 on a stabilized apartment property and expects to sell in year three. Assume a 10-year fixed rate at the 10-year Treasury plus 1.40%, about 6.34%, and a floating rate at 30-day average SOFR plus 2.20%, about 6.10%, with a rate cap that costs the equivalent of 0.25% a year. Both amortize on a 30-year schedule.

First-year cost (illustration)	Fixed	Floating
Rate	6.34%	6.10% today
Interest, year one (about)	$760,800	$732,000
Rate cap, per year (about)	none	$30,000
All-in	about $760,800	about $762,000
If SOFR rises 2.00%	unchanged	about $972,000 plus the cap’s payout above the strike

At today’s readings the two cost almost the same once the cap is in. The floating loan breaks even with the fixed loan only if SOFR averages about 3.89% or less over the hold. The floating borrower is betting on short rates falling; the fixed borrower is paying a little insurance to avoid that bet.

Now the sale in year three. The difference that matters shows up here.

Exit at the end of year three (illustration)	Fixed: yield maintenance	Floating: declining premium
Balance (about)	$11,558,000	$11,538,000
If the Treasury yield used is 4.25%	about $1,347,000	3% of balance, about $346,000
If it is 5.00%	about $842,000	about $346,000
If it is 6.00%	about $206,000	about $346,000

The yield maintenance figures use Fannie Mae’s formula with 78 months left in the yield maintenance period: YM = principal prepaid x (note rate minus Treasury yield) x [1 - (1 + r)^(-n/12)] / r, with r the Treasury yield and n the months left⁴. The floating premium follows Fannie’s SARM schedule: SARM: locked out in loan year 1, then 4%, 3%, 2%, 1%, then 1% in later years where the term runs longer⁵. Unless rates rise a long way, a short-hold owner pays far less to leave a floating loan.

Who should float

• Owners who will sell or refinance within the first few years.
• Value-add plans financed with bridge or debt fund loans, which float by design. The largest public mortgage REIT reports its book at +3.08% over floating benchmark rates (mostly SOFR)⁶.
• Borrowers with enough coverage to absorb a rate rise up to the cap’s strike.

Who should fix

• Long-term holders of stabilized property.
• Borrowers whose coverage would fail if the index rose to the cap strike.
• Anyone who cannot afford to replace a cap at extension or maturity.
• Commercial property financed in CMBS, where fixed is the norm and conduit pools have priced at rates like 6.43%⁷ on average this year.

The costs people miss

• Cap replacement. Caps are bought for a term. Extending a floating loan usually means buying a new cap at the market price then, which can be much higher after a rate move.
• Cap escrow. Some lenders collect monthly toward the replacement cap.
• Actual/360 on both. Most commercial loans charge interest on an Actual/360 basis, which makes a quoted rate slightly more expensive per year. Actual/360: interest = balance x rate / 360 x actual days in the month⁴.
• Index floors. Many floating loans set a minimum index level, so you keep paying the floor even if SOFR falls below it. Read the floor before you count on falling rates.

Unsure which fits your hold? Send the plan and the property numbers, and we will price both on the same loan.