Loan Structure · Nationwide · Updated September 2026
The rate type decides more than the payment. It sets what it costs to leave early, how much you can borrow and how much risk you carry when rates move. Here is how each one works, and how to choose for your hold period.
By Michael McGovern, Founder | 25+ Years in Commercial LendingCommercial Mortgage Connection · Yonkers, NY The short answer
A fixed vs variable rate commercial mortgage decision is really a decision about your hold period. Fix the rate when you plan to own a stabilized property for most of the loan term and want a payment that cannot move. Float it when you expect to sell, refinance or finish a business plan within a few years and need a cheaper way out, and budget for a rate cap. The prepayment terms usually decide it, not the starting rate.
- Fixed rate: priced off a Treasury yield plus a lender spread and locked for the term. Leaving early usually costs yield maintenance, defeasance or a declining prepayment premium.
- Variable (floating) rate: priced off SOFR plus a spread and reset as the index moves. Usually cheaper to prepay, and often paired with a required interest rate cap.
- Hybrids exist: some programs let a floating-rate loan convert to fixed later. Fannie Mae's Structured ARM allows conversion starting in year two.
- Apartments: stabilized buildings usually suit fixed-rate agency or bank debt; value-add and lease-up deals usually start on a floating-rate bridge loan.
Facts verified 22 September 2026 against the Federal Reserve Bank of New York, FRED, Fannie Mae and the UK Financial Conduct Authority. Rates and program terms change; nothing on this page is a rate quote.
What this page covers
- How fixed and variable commercial mortgage rates are set
- Fixed vs. variable at a glance
- What a rate move costs on a floating-rate loan
- Prepayment: the term that usually decides it
- Rate caps, floors and swaps
- Apartment buildings: how the choice usually plays out
- How to choose: five questions
- When neither rate type fixes the deal
- How a broker compares fixed and floating quotes
- Fixed vs variable rate commercial mortgage: FAQ
How fixed and variable commercial mortgage rates are set
Both rate types start from a public benchmark and add a lender spread for the property, the leverage and the borrower. What differs is which benchmark the lender uses, and whether the rate is allowed to move after closing.
Fixed rates
A fixed-rate commercial mortgage is usually priced off a U.S. Treasury yield with a maturity close to the loan term, often the 5-, 7- or 10-year, plus the lender's spread. The rate is set at rate lock and stays put for the fixed term. Agency lenders let borrowers lock early: Fannie Mae, for example, offers a Treasury lock that protects the index while underwriting continues, and rate locks of up to 180 days.
Variable rates
A variable-rate, or floating-rate, commercial mortgage is priced off a short-term index plus a spread, and the rate resets as the index moves, often monthly. The main index today is SOFR, the Secured Overnight Financing Rate, which the Federal Reserve Bank of New York publishes each business day as a broad measure of the cost of borrowing cash overnight against Treasury collateral. Fannie Mae's Structured ARM resets off the 30-day average of SOFR, and many bank loans use SOFR or the prime rate.
If an older loan document still mentions LIBOR, it has already been switched to a replacement rate: the U.S. dollar LIBOR panel ended on 30 June 2023, and SOFR became the standard benchmark. For how both benchmarks move through a credit cycle, see what drives commercial mortgage rates.
Where the benchmarks stand now
On 18 September 2026, SOFR was 3.85%, while the 5-year and 10-year Treasury yields were 4.86% and 5.01%, according to FRED. With short-term rates below long-term rates, a floating-rate loan's index starts about 1.0 to 1.2 points below the fixed-rate benchmarks, before lender spreads. Spreads differ by product and lender, so the gap in quoted rates can be wider or narrower, and it shrinks if short-term rates rise.
| Benchmark | Used for | 18 September 2026 |
|---|---|---|
| SOFR (overnight) | Variable-rate loans | 3.85% |
| 5-year Treasury yield | 5-year fixed-rate loans | 4.86% |
| 10-year Treasury yield | 10-year fixed-rate loans | 5.01% |
Fixed vs. variable at a glance
| Feature | Fixed rate | Variable (floating) rate |
|---|---|---|
| Rate after closing | Locked for the fixed term | Resets as the index moves, often monthly |
| Benchmark | Treasury yield near the loan term | SOFR, or the prime rate at some banks |
| Starting rate | Depends on the yield curve | Tends to start lower when short-term rates sit below long-term rates, and higher when the curve is inverted |
| Leaving early | Yield maintenance, defeasance or a declining premium | Often a short lockout, then a small premium (Fannie Mae Structured ARM: 1% after year one) |
| Rate protection | Built in | Usually an interest rate cap; agency programs use approved cap providers |
| Loan sizing | Sized on the locked rate | Some lenders size on a stressed rate or the cap strike, which can mean a smaller loan |
| Best fit | Stabilized property, long hold | Value-add, lease-up, or a sale or refinance within a few years |
| Main risk | Paying to exit if plans change | Payments rising faster than rents |
What a rate move costs on a floating-rate loan
The arithmetic is simple and worth doing before you sign. On a floating-rate loan, every percentage point the index moves changes your annual interest by 1% of the balance. The table assumes interest-only payments, which isolates the rate effect; payments on an amortizing loan move by a similar amount.
| Loan balance | Index up 0.50 point | Index up 1.00 point | Index up 2.00 points |
|---|---|---|---|
| $2,000,000 | +$10,000 a year | +$20,000 a year | +$40,000 a year |
| $5,000,000 | +$25,000 a year | +$50,000 a year | +$100,000 a year |
| $10,000,000 | +$50,000 a year | +$100,000 a year | +$200,000 a year |
| $20,000,000 | +$100,000 a year | +$200,000 a year | +$400,000 a year |
Now set that number against the property's net operating income. If a 2-point rise would push debt service coverage below what your lender requires, or below what you can comfortably carry, you need either a cap that stops the payment before that point or a fixed rate.
Prepayment: the term that usually decides it
Most borrowers compare starting rates. The bigger number is often the cost of leaving early, and it sits in the prepayment section of the term sheet.
Fixed-rate prepayment
- Yield maintenance. You pay roughly the interest the lender or its investors lose when your payoff has to be reinvested at a lower rate. Fannie Mae describes it as aligning prepayment costs with market conditions. When rates have fallen since closing, it can be large.
- Defeasance. Common on CMBS loans. Instead of repaying the loan, you buy a portfolio of government securities that replaces its remaining payments. It is expensive, takes time and needs outside specialists.
- Declining premium. A set percentage of the balance that steps down over the years. Fannie Mae offers a declining prepayment premium structure across both fixed-rate and variable-rate loans.
Floating-rate prepayment
Floating-rate loans are usually cheaper to exit. Fannie Mae's Structured ARM, a program for loans of $25 million or more, carries a one-year lockout followed by a 1% prepayment premium, and the loan can convert to a fixed rate starting in year two with no prepayment premium charged at conversion.
The practical rule is to line the prepayment schedule up with the business plan. If you expect to sell or refinance in year three, a 10-year fixed rate with yield maintenance can cost more to leave than the rate saved while you held it.
Rate caps, floors and swaps
Interest rate caps
A cap is a contract that pays you when the index rises above a set strike rate, which limits how high your effective rate can go. Agency floating-rate programs generally require the borrower to buy one from an approved provider, and Fannie Mae publishes a list of approved cap providers. The price depends on the strike, the term and how volatile rates are when you buy it, and it is usually paid up front, so count it as part of the loan cost.
Floors
Many floating-rate loans also set a floor, a minimum index level or rate, so your payment does not fall below a set point even if the index does. Read the floor next to the cap: together they define the range your rate can move in.
Swaps
Banks often write floating-rate loans and pair them with an interest rate swap that converts the payment to a fixed rate. It behaves much like a fixed-rate loan, with one difference to plan for: ending the swap early can cost money if rates have fallen, or pay you if they have risen.
Apartment buildings: how the choice usually plays out
For apartment buildings, the rate type usually follows the business plan.
- Stabilized, long hold: a fixed rate from an agency, bank or life company, sized on current income. Compare options on our apartment building loans page.
- Value-add or lease-up: a floating-rate bridge loan while units are renovated and leased, then a refinance into fixed-rate permanent debt once the rent roll supports it.
- Large stabilized loans that want both: floating-rate programs with a conversion option, such as Fannie Mae's Structured ARM for loans of $25 million or more.
- Several properties at once: portfolio lenders that keep loans on their own balance sheet can sometimes offer more flexible prepayment terms.
The mistake to avoid is a 10-year fixed rate with heavy yield maintenance on a building you plan to reposition and sell in three years.
How to choose: five questions
- How long will you hold the property? Match the fixed period, or the prepayment schedule, to it.
- Is the income stable today? Stabilized income suits a fixed rate; income that is still climbing suits a floating rate with room to refinance.
- What does a 2-point rise do to coverage? Run the table above against your net operating income.
- What does it cost to leave early under each term sheet? Price the prepayment in dollars for the year you expect to exit.
- Can the deal carry a cap and still meet coverage? Add the cap price to the floating option before you compare.
If the answers split, a hybrid structure or a shorter fixed term, such as 5 years instead of 10, often closes the gap.
When neither rate type fixes the deal
Some deals do not work at either rate. If the numbers only work at today's floating rate with no cap, the deal is betting on rates, not on the property. If coverage fails at the fixed rate, a floating loan usually just moves the problem to the next reset. In both cases the answer is more equity, a lower price or a different lender type, not a different rate type.
How a broker compares fixed and floating quotes
Commercial Mortgage Connection is a commercial mortgage broker headquartered in Yonkers, NY, placing loans through a network of 750+ lenders in all 50 states. On a rate-type decision the useful part is the side-by-side: fixed and floating quotes on the same property, with the prepayment cost priced in dollars for your likely exit year and the cap cost added to the floating option.
Michael McGovern reviews the file himself. If the numbers favor the simplest option, a straightforward fixed-rate commercial mortgage from a single lender, you will hear that too.
Does this apply in your state?
Fixed-rate and floating-rate structures are offered nationwide, and Commercial Mortgage Connection arranges financing in all 50 states. Lender appetite, broker licensing and closing rules vary by state, so confirm the specifics for the state where the property sits before you sign a term sheet.
Fixed vs variable rate commercial mortgage: FAQ
Is a fixed or variable rate better for a commercial mortgage?
Neither is better in general. A fixed rate suits a stabilized property you plan to hold for most of the loan term, because the payment cannot move. A variable rate suits a shorter hold or a value-add plan, because it is usually cheaper to prepay. Compare both on total cost for the years you expect to keep the loan, including prepayment and any rate cap.
What index do variable-rate commercial mortgages use now?
Most use SOFR, the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York, often as a 30-day average. Some bank loans use the prime rate. LIBOR is no longer the benchmark: the U.S. dollar LIBOR panel ended on 30 June 2023.
Can I switch from a variable rate to a fixed rate later?
Sometimes. Some programs include a conversion option; Fannie Mae's Structured ARM, for example, can convert to a fixed rate starting in year two with no prepayment premium charged at conversion. Otherwise the usual routes are refinancing, which may trigger a prepayment premium, or adding an interest rate swap on a bank loan.
Why are prepayment penalties higher on fixed-rate loans?
Because the lender, or the bond investors behind the loan, are counting on your fixed rate for the full term. If you repay early after rates fall, they lose that income, so yield maintenance, defeasance or a declining premium compensates them. Floating-rate loans reset with the market, so lenders lose less when they are repaid early.
Do I need an interest rate cap on a floating-rate commercial mortgage?
Often, yes. Agency floating-rate programs generally require the borrower to buy a cap from an approved provider, and many other lenders ask for one or size the loan more conservatively without it. The cap price depends on the strike rate, the term and market volatility, so include it in the cost comparison.
Sources
- Federal Reserve Bank of New York, Secured Overnight Financing Rate (SOFR). Definition and daily publication. Checked 22 September 2026.
- UK Financial Conduct Authority, The USD LIBOR panel ceases at end-June 2023. Checked 22 September 2026.
- Fannie Mae Multifamily, Structured Adjustable-Rate Mortgage (SARM). Index, prepayment, conversion and cap providers. Checked 22 September 2026.
- Fannie Mae Multifamily, Rate Lock and Prepay Options. Treasury lock, rate lock periods, yield maintenance and declining prepayment premium. Checked 22 September 2026.
- Federal Reserve Bank of St. Louis (FRED), Secured Overnight Financing Rate. Observation for 18 September 2026. Checked 22 September 2026.
- FRED, 5-Year Treasury Constant Maturity Rate. Observation for 18 September 2026. Checked 22 September 2026.
- FRED, 10-Year Treasury Constant Maturity Rate. Observation for 18 September 2026. Checked 22 September 2026.
Michael McGovernFounder, Commercial Mortgage Connection. Michael wrote and updated this guide drawing on a career that began at Bear Stearns & Co. in 1997, ran through structuring billions of dollars in CMBS and MBS in Bear's F.A.S.T. group and selling mortgage product at Lehman Brothers, and now spans more than $1 billion in originated mortgages.
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Facts on this page were verified against the cited Federal Reserve Bank of New York, Fannie Mae, FRED and FCA sources on 22 September 2026. Rates, program terms and lender appetite change, and the rate-move table is arithmetic, not a forecast or a quote. Nothing on this page is a loan offer, a rate quote, or personalized financial advice; all financing is subject to lender approval, credit review and property underwriting, and no approval is guaranteed. Broker licensing and closing rules vary by state. Commercial Mortgage Connection is a commercial mortgage brokerage, is paid when loans close, and sells the service described on this page. Equal Housing Opportunity. Call 888-656-9812 to discuss your scenario.
