Fixed vs Floating Apartment Loans
How each rate is built, what you give up with each, and a live table of the indexes they price from.
A fixed-rate apartment loan is priced over the Treasury yield matching its term and locks your payment, but usually costs more to leave early. A floating-rate loan is priced over SOFR, moves with short-term rates, usually needs an interest rate cap and is often cheaper to prepay. Long holds favor fixed; short or uncertain holds favor floating.
The short version
Fixed versus floating is not a bet on where rates go. It is a choice between knowing your payment and keeping your exit cheap. A fixed loan protects your debt service coverage for the full term and usually costs more to leave early. A floating loan moves with short-term rates, usually requires you to buy an interest rate cap, and is often cheaper to prepay.
If you will hold the building through the loan term and the property is stabilized, fixed usually fits. If you plan to sell, refinance into permanent debt after a renovation, or are unsure of your hold, floating often fits better.
How each rate is built
Every apartment loan rate is an index plus a spread. The index is public and the same for every borrower. The spread is what the lender charges for your deal, and it is what you negotiate.
- Fixed rate = the Treasury yield that matches the loan term (the 10-year for a 10-year loan, the 5-year or 7-year for shorter terms) plus the lender's spread, set when you lock.
- Floating rate = SOFR, the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York, plus the lender's margin, reset monthly. Many loans use the 30-day average of SOFR rather than a single day's print.
Today's prints for both indexes:
Today's index rates
Loading today's prints from the U.S. Treasury and the New York Fed…
The table shows indexes only. Spreads and margins depend on the program, leverage, property and sponsor, and you only see them in a quote. For how spreads move and what drives them, see apartment refinance rates.
Side by side
| Term | Fixed rate | Floating rate |
|---|---|---|
| Index | Treasury yield matching the term | SOFR, often the 30-day average |
| Payment | Set for the term | Resets with the index, usually monthly |
| Rate risk | On the lender | On you, limited by a cap if you buy one |
| Interest rate cap | Not needed | Commonly required by the lender; an upfront cost |
| Prepayment | Commonly yield maintenance, defeasance or a declining premium | Often a short lockout or a small fee, then open |
| Typical use | Stabilized buildings, long holds | Bridge loans, value-add, expected sale or refinance |
| Sizing | DSCR tested at the locked rate | DSCR often tested at the cap strike or a stressed rate |
Terms vary by lender and program. Fannie Mae's Small Loan program offers both fixed- and variable-rate options, with yield maintenance and declining-premium prepayment choices. Freddie Mac's Conventional Small is fixed-rate only. Freddie Mac's floating-rate loan, for loans of $10 million and up, prices off the 30-day average SOFR for 5-, 7- or 10-year terms and offers prepayment options as light as 1% after a one-year lockout, or step-downs such as 3-2-1%. Compare that with Freddie's fixed-rate standard: yield maintenance until the loan is securitized, then defeasance.
What a floating loan really costs
Comparing a floating rate to a fixed rate on the day you quote is misleading. Three costs sit outside the headline number.
The cap
An interest rate cap pays you when the index rises above a strike rate, so your effective rate cannot go above the strike plus your margin. Lenders commonly require one on floating-rate loans, sized to the loan, with a term that covers the loan. You pay for it upfront, and its price rises with rate volatility and with how close the strike is to today's index. When the cap expires before the loan does, many lenders require you to buy a replacement, sometimes funded through a monthly escrow. Price it with the rate cap calculator.
Payment movement
On a floating loan, each move in the index flows straight into your debt service. Say you borrow $5,000,000 on a floating loan. A one percentage point rise in SOFR adds $50,000 a year of interest. If your building earns $450,000 of NOI, that one move can take your coverage close to the lender's minimum. Test your own building across rate moves with the DSCR sensitivity calculator.
The refinance at the end
Floating loans are usually shorter. That means another refinance, with new reports, fees and a new market. A fixed loan with a long term removes that event from your hold.
What a fixed loan really costs
The cost of a fixed loan is in the exit. Yield maintenance compensates the lender for interest it loses if you repay early, so it grows when rates have fallen since you locked. Defeasance replaces the loan's payments with government securities and carries consultant and legal fees. A declining premium is a set percentage that steps down over the term, and is easier to predict.
If there is a real chance you will sell or refinance before maturity, price the exit before you lock. Read the prepayment penalty guide and run the numbers with the yield maintenance calculator. If your current loan is already fixed and the rate is high, the refinance break-even calculator shows whether paying the prepayment now beats waiting for the open window.
How to decide
- Write down your hold. If you expect to own the building past the end of a 7- or 10-year term, fixed usually wins. If you expect to sell or refinance within three years, floating often wins.
- Check the building's position. A stabilized building can take a fixed permanent loan now. A building mid-renovation or lease-up is usually on floating bridge debt until it stabilizes. Test that takeout with the bridge takeout test.
- Stress the coverage. If a plausible rise in SOFR would push your floating-rate DSCR below the lender's minimum, the cap strike becomes the real rate you should plan around.
- Price both exits. Compare the floating loan's cap cost and refinance cost against the fixed loan's prepayment cost at your expected hold, using the term sheet comparison.
Some programs offer a middle path: an adjustable or hybrid loan that floats with built-in limits, or a loan that starts floating and converts to fixed. See Fannie Mae hybrid ARM loans and Freddie Mac floating-rate loans.
Frequently asked questions
Is a fixed or floating rate better for an apartment loan?
Neither is better in general. A fixed rate fits a stabilized building you will hold through the loan term, because it locks your payment and removes rate risk. A floating rate fits a short or uncertain hold, a renovation or a planned sale, because it is usually cheaper to prepay. Decide on your hold period and exit plan, not on which headline rate is lower today.
What index are floating-rate apartment loans based on?
Most floating-rate apartment loans, including agency floating-rate products and bridge loans, are priced as a margin over SOFR, the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York. Many use the 30-day average of SOFR. Fixed-rate loans are priced as a spread over the Treasury yield that matches the loan term.
Do I need an interest rate cap on a floating-rate apartment loan?
Usually yes. Lenders commonly require borrowers on floating-rate loans to buy an interest rate cap that limits how high the index can effectively go. You pay for it upfront, and if it expires before the loan, you may need to buy a replacement. Ask each lender for its cap requirements, including strike, term and whether a replacement escrow applies.
Why does a fixed-rate apartment loan cost so much to pay off early?
Most fixed-rate apartment loans are sold to investors who expect a set stream of interest. Yield maintenance or defeasance compensates them if you repay early, and the cost grows when market rates have fallen since you locked. A declining-premium option, where available, sets a fixed percentage that steps down over time and is easier to plan around.
Where can I see today's Treasury and SOFR rates?
This page shows today's Treasury and SOFR prints, pulled from the U.S. Treasury and the Federal Reserve Bank of New York. Our apartment loan data page has the same live table with more detail on each index. Remember the index is only part of your rate: the lender adds a spread or margin based on your deal.
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