Understanding Commercial Mortgage Interest Rates: Fixed, Floating & Spreads

"What rate can I get?" is the first question every CRE borrower asks. It's also the least useful question to ask without context.

Commercial mortgage interest rates aren't a single number. They're a combination of a benchmark index, a lender-specific spread, and a set of factors unique to your deal. Two borrowers financing identical properties on the same day can get rates that differ by 200 basis points or more depending on the lender type, loan structure, and negotiation.

Understanding how commercial mortgage rates actually work, how they're built, what drives them up or down, and when to choose fixed versus floating, gives you a massive advantage when evaluating term sheets and structuring deals.

In this week's Debt Fridays, we're pulling apart the components of a commercial mortgage rate so you know exactly what you're paying for, why, and how to get the best terms for your deal.

How Commercial Mortgage Rates Are Built

Every commercial mortgage rate has two components:

Rate = Benchmark Index + Lender Spread

The benchmark index is a market rate that the lender doesn't control. The spread is the premium the lender charges on top of that index for the risk of your specific loan. Understanding both pieces is the key to understanding your rate.

The Major Benchmark Indices

10-Year U.S. Treasury Yield

• Currently around 4.27% (as of April 2026)
• The benchmark for most long-term, fixed-rate commercial mortgages
• When you hear "rates are going up," this is usually what's moving
• Driven by inflation expectations, Federal Reserve policy, government borrowing, and global demand for safe assets

SOFR (Secured Overnight Financing Rate)

• Currently tracking near the federal funds rate range of 3.50-3.75%
• The benchmark for floating-rate commercial loans
• Replaced LIBOR as the standard floating-rate index starting in 2023
• Based on actual transactions in the Treasury repurchase market, making it more transparent than LIBOR ever was
• Quoted as 1-month or 30-day Term SOFR for most commercial loans

Prime Rate

• Currently 6.75%
• Used primarily by banks for smaller commercial loans and lines of credit
• Moves in lockstep with the federal funds rate (Prime = Fed Funds + 3.00%)
• Less common for institutional CRE financing

The Lender Spread

The spread is where the lender makes their money and where the real negotiation happens. It compensates the lender for:

• Credit risk: How likely is this borrower to default?
• Property risk: How stable is the cash flow and value of this asset?
• Market risk: How strong is the local real estate market?
• Liquidity risk: How easy would it be to sell this loan?
• Operational costs: Origination, servicing, and overhead
• Profit margin: What return the lender needs on their capital

Spreads typically range from 150 to 400+ basis points over the relevant index:

Putting It Together

Here's how a rate gets built for a stabilized multifamily property:

• 10-Year Treasury: 4.27%
• Agency spread: +175 bps (1.75%)
• All-in rate: 6.02%

Compare that to a value-add bridge loan on the same property before stabilization:

• 30-Day Term SOFR: 3.65%
• Bridge lender spread: +375 bps (3.75%)
• All-in rate: 7.40%

Same property. Same borrower. Different loan structure, different rate. The index and spread tell you why.

Fixed Rate vs. Floating Rate: When to Choose Each

This is the most consequential rate decision you'll make on any deal, and there's no universally right answer. It depends on your hold period, risk tolerance, business plan, and view on where rates are heading.

Fixed-Rate Loans

A fixed-rate commercial mortgage locks in your interest rate for the entire loan term. Your payment doesn't change regardless of what happens to Treasury yields, SOFR, or Federal Reserve policy.

How they're priced: Spread over the 10-Year Treasury yield (or the interest rate swap rate for some lenders). The rate is set at the time of rate lock, which can happen at application, commitment, or closing depending on the lender.

Current market: Fixed-rate commercial mortgages are starting around 5.36-6.50% depending on property type, leverage, and lender, with the best agency and life company rates at the low end.

Advantages:

• Payment certainty for the full loan term
• Protection against rising rates
• Easier budgeting and cash flow planning
• Simplifies your hold period analysis

Disadvantages:

• Typically 25-75 bps higher than initial floating rates
• Prepayment penalties are often more restrictive (yield maintenance or defeasance)
• You don't benefit if rates decline after closing
• Rate lock risk during the closing process (rates can move between application and closing)

Best for:

• Stabilized, cash-flowing properties you plan to hold for the full loan term
• Borrowers who prioritize payment certainty over optimizing every basis point
• Long-term holds where the predictability justifies the premium
• Risk-averse investors who want to lock in current rates

Floating-Rate Loans

A floating-rate commercial mortgage adjusts periodically based on changes in the underlying index (usually SOFR). As the index moves, your payment moves with it.

How they're priced: Spread over SOFR (1-month or 30-day Term SOFR is most common). The spread is fixed for the loan term, but the all-in rate changes as SOFR moves. Rate resets typically happen monthly.

Current market: Floating-rate loans are pricing around 5.84% on average (SOFR coupon), which has actually converged with fixed rates in early 2026 as the yield curve has flattened.

Advantages:

• Lower initial rates when the yield curve is steep (short-term rates below long-term rates)
• Typically more flexible prepayment terms (no yield maintenance or defeasance)
• You benefit if rates decline
• Better suited for shorter hold periods where you don't need long-term rate certainty

Disadvantages:

• Payment uncertainty: your debt service changes as rates move
• Rate cap costs: many floating-rate lenders require you to purchase an interest rate cap, which is an additional upfront expense
• Underwriting complexity: lenders stress-test floating-rate loans at higher rates, which can reduce your maximum loan amount
• If rates rise, your cash flow shrinks and your DSCR may fall below covenant levels

Best for:

• Value-add and transitional deals with a 1-3 year business plan
• Bridge loans where you plan to refinance into fixed-rate permanent debt
• Borrowers with a strong conviction that rates will decline
• Deals where prepayment flexibility is critical to the exit strategy

The 2026 Twist: Fixed and Floating Are Converging

Here's something unusual about the current market: fixed and floating rates are nearly identical. The average SOFR coupon (5.84%) has dropped just below the average fixed-rate coupon (5.86%) as of early 2026. This happens when the yield curve is flat, meaning short-term rates and long-term rates are roughly the same.

What this means for borrowers:

• The traditional argument for floating ("I'll start lower and save money") doesn't hold when fixed rates are the same or lower
• If you can lock in a fixed rate at roughly the same cost as floating, the payment certainty comes essentially free
• Floating rates still make sense for short-term bridge and value-add deals where prepayment flexibility matters more than rate

Interest Rate Caps: The Hidden Cost of Floating-Rate Loans

If you're taking a floating-rate loan, your lender will almost certainly require you to purchase an interest rate cap. This is an insurance product that limits how high your rate can go, even if SOFR spikes.

How They Work

You pay an upfront premium for a cap that sets a maximum SOFR level. If SOFR exceeds that level, the cap provider pays you the difference.

Example:

• Your loan is priced at SOFR + 3.00%
• You purchase a SOFR cap at 4.50%
• If SOFR rises to 5.50%, the cap provider pays you the 1.00% difference
• Your effective rate is capped at 7.50% (4.50% + 3.00% spread) instead of 8.50%

The Cost

Rate caps can be expensive, especially for longer terms and lower strike rates. Cap costs vary significantly based on:

• The notional loan amount
• The cap term (1 year, 2 years, 3 years)
• The strike rate (lower strikes = more expensive)
• Market volatility expectations

In the current market, a 2-year cap on a $10 million loan with a 4.00% strike might cost $75,000-$150,000 upfront. That's a real cost that affects your returns and should be factored into your deal analysis.

Negotiation Tip

Some lenders allow you to adjust the strike rate, term, or provider. A higher strike rate reduces the cost (but provides less protection). Negotiate the minimum cap requirements with your lender to balance cost and protection.

What Drives Rates Up and Down

Understanding the macro forces behind rate movements helps you time your financing and set expectations:

Factors That Push Rates Higher

• Inflation running above target: The Fed keeps rates elevated to cool the economy
• Strong economic growth: Higher demand for capital drives up borrowing costs
• Government deficit spending: More Treasury issuance increases supply and pushes yields up
• Global uncertainty: Investors demand higher returns for perceived risk
• Lender caution: Wider spreads when lenders see increased risk in a property type or market

Factors That Push Rates Lower

• Economic slowdown: Reduced demand for capital and flight to safety in Treasuries
• Fed rate cuts: Directly lowers short-term rates (SOFR, Prime) and signals lower-for-longer
• Low inflation: Reduces the need for restrictive monetary policy
• Lender competition: Tighter spreads when lenders compete for quality deals
• Global capital flows: Foreign demand for U.S. Treasuries pushes yields down

Where We Are in April 2026

The Fed has cut the federal funds rate to 3.50-3.75% and signaled one more potential cut this year. Long-term rates (10-Year Treasury at ~4.27%) have been stubbornly higher than short-term rates would suggest, driven by government deficit concerns and persistent inflation expectations. SOFR spreads are flat at 2.16% month-over-month, and fixed and floating coupons have converged near 5.85%.

The consensus view: rates are stabilizing, not declining rapidly. Borrowers should underwrite at current rates rather than betting on significant further cuts.

How to Get the Best Rate on Your Deal

1. Improve Your DSCR

Lenders give the best rates to deals that generate strong cash flow relative to debt service. A DSCR of 1.40x will get better pricing than 1.25x because the lender faces less risk.

2. Reduce Your LTV

Lower leverage means less risk for the lender, which translates directly to a tighter spread. The difference between 75% LTV and 65% LTV pricing can be 25-50 basis points or more.

3. Present a Stabilized Property

Stabilized, cash-flowing assets with strong occupancy and market-rate leases get the best rates. Value-add, transitional, and lease-up properties pay a premium because they carry execution risk.

4. Strengthen Your Sponsorship

Experienced sponsors with clean credit, strong net worth, and a relevant track record get better pricing. Lenders price borrower risk into the spread, especially on recourse loans.

5. Choose the Right Lender Type

Agency and life insurance companies offer the tightest spreads for deals that fit their box. Don't take a bank loan at 6.5% when your stabilized multifamily qualifies for agency debt at 5.5%.

6. Get Multiple Quotes

This is the simplest and most effective strategy. Lenders compete on spread. When they know you have other offers, spreads tighten. Platforms like LenderAve automate this by delivering multiple term sheets so you can compare rates, spreads, and total cost of capital side by side.

7. Time Your Rate Lock

If you're taking a fixed-rate loan, the timing of your rate lock matters. Lock too early and you might pay a premium for the extended lock period. Lock too late and rates might move against you during closing. Work with your lender to understand lock timing, costs, and extension options.

The Bottom Line

A commercial mortgage rate isn't a single number pulled out of thin air. It's a benchmark index plus a lender spread, shaped by your property's performance, your strength as a borrower, the competitive landscape among lenders, and broader economic forces.

The key takeaways:

• Every rate has two pieces: the benchmark index (Treasury, SOFR, Prime) and the lender spread. The spread is where you negotiate.
• Fixed rates give you certainty. Floating rates give you flexibility. In 2026, they're priced almost identically, making fixed rates unusually attractive.
• Spreads range from 140 to 500+ basis points depending on lender type, property quality, and borrower strength
• Rate caps are a real cost of floating-rate debt that needs to be in your deal analysis
• The best way to get a competitive rate is to get multiple quotes. Lenders compete on spread, and competition is the borrower's best friend.

Stop asking "what rate can I get?" Start asking "what spread over what index, from what lender type, on what terms?" That's the question that leads to better financing.

Want to compare rates from multiple lenders on your deal? Submit on LenderAve and receive competing term sheets with transparent rate breakdowns.

About Debt Fridays

Debt Fridays is LenderAve's weekly blog series delivering practical insights on commercial real estate financing. Published every Friday, we cover everything from lending basics to advanced deal strategies. Subscribe to never miss an issue.

Have a topic you'd like us to cover? Email us at info@lenderave.com

Tags: Debt Fridays, Commercial Real Estate, CRE Financing, CRE Basics, Commercial Mortgage Rates, Fixed vs Floating Rate, SOFR, Interest Rate Spread, CRE Loan Pricing