Choosing between a fixed or variable rate commercial mortgage is one of the most consequential decisions you will make when financing investment property. The wrong rate structure can cost you tens of thousands of dollars over the life of a loan, while the right choice can boost cash flow and protect your returns.
As of February 2026, the Federal Reserve holds the federal funds rate at 3.50-3.75% after three consecutive cuts in late 2024, and SOFR sits at approximately 3.65%. Fixed commercial mortgage rates range from 5.18% to 7.50% depending on the loan product and borrower profile, while floating-rate products typically price at SOFR plus 200-450 basis points. The gap between fixed and variable options has narrowed, making the decision more nuanced than ever.
This guide breaks down exactly how each rate type works, what they cost in 2026, and when each structure makes sense for your commercial real estate investment.
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What is the difference between fixed and variable rate commercial mortgages?
A fixed-rate commercial mortgage locks your interest rate for the entire loan term or a defined period within the term. Your monthly debt service payment stays the same regardless of what happens in the broader economy. If you close at 6.25% on a 10-year fixed loan, you pay 6.25% from the first payment to the last.
A variable-rate commercial mortgage (also called a floating-rate or adjustable-rate loan) ties your interest rate to a benchmark index, most commonly the Secured Overnight Financing Rate (SOFR). Your rate equals the index plus a fixed spread, and it adjusts at regular intervals, typically monthly or quarterly. If SOFR moves up, your payment goes up. If SOFR drops, your payment drops with it.
The fundamental tradeoff is straightforward: fixed rates buy you certainty at a higher initial cost, while variable rates offer lower starting payments in exchange for future uncertainty.
Fixed-rate loans dominate the permanent financing market. Products like conduit (CMBS) loans, agency loans, and traditional bank permanent loans typically offer fixed rates for 5, 7, or 10-year terms. Variable-rate structures are more common in transitional lending, including bridge loans, construction loans, and value-add financing where borrowers plan to refinance or sell within a few years.
According to the Federal Reserve Bank of New York, SOFR replaced LIBOR as the primary benchmark for floating-rate commercial loans beginning in June 2023. Nearly all new floating-rate commercial mortgages now reference Term SOFR, which publishes daily forward-looking rates for 1-month, 3-month, and 6-month periods.
Is a fixed or variable rate better for commercial property?
The answer depends on your investment strategy, hold period, risk tolerance, and outlook on interest rates. Neither option is universally superior.
Fixed rates work best when:
- You plan to hold the property for 5 or more years and want payment stability
- The property is stabilized with predictable cash flow and thin margins
- You believe interest rates will rise or stay flat during your hold period
- You have tenants on long-term leases and need to match fixed rental income with fixed debt service
- Your debt service coverage ratio (DSCR) is close to lender minimums, leaving little room for payment increases
Variable rates work best when:
- You plan to sell or refinance within 1-3 years
- You are executing a value-add or repositioning strategy with a planned exit
- The yield curve is inverted or flat, making short-term rates meaningfully cheaper
- You want flexibility to prepay without penalties (most floating-rate loans have no prepayment restrictions)
- You expect rates to decline during your hold period
For a stabilized multifamily or office building you intend to hold long-term, a fixed-rate permanent loan from Clearhouse Lending typically makes more sense. For a bridge loan to acquire and reposition a distressed asset over 18 months, a floating-rate structure is standard and often the only option available.
As discussed in our commercial loan term sheet guide, the rate structure is one of the first items you should evaluate on any term sheet because it drives your total cost of borrowing and risk exposure.
What is a good interest rate for a commercial mortgage in 2026?
Commercial mortgage rates vary significantly by loan type, leverage, property class, and borrower strength. Here is where rates stand as of February 2026, based on data from the Federal Reserve, Chatham Financial, and industry pricing surveys.
A "good" rate depends on your specific loan product:
- Agency permanent loans (Fannie/Freddie multifamily): 5.18-5.75% fixed, the lowest cost option for qualifying multifamily properties
- CMBS/conduit loans: 5.50-6.50% fixed for stabilized commercial properties
- Bank permanent loans: 5.75-7.00% fixed or SOFR + 200-300 bps variable
- Bridge loans: SOFR + 275-450 bps (typically 6.40-8.15% all-in at current SOFR)
- SBA 504 loans: 5.75-6.50% fixed for the CDC debenture portion
- Hard money/private: 9.00-12.75% depending on leverage and risk
The 5-year U.S. Treasury yield, which heavily influences 5-year fixed commercial rates, hovered near 4.10-4.25% in early February 2026. The 10-year Treasury sat at approximately 4.26%, establishing the floor for longer-term fixed-rate pricing. Lenders then add a credit spread of 150-300 basis points above the corresponding Treasury benchmark to arrive at the borrower's rate.
For floating-rate products, the all-in rate formula is straightforward: Term SOFR (approximately 3.65% in February 2026) plus the lender's spread (typically 200-450 basis points depending on the loan type and risk profile). Use our commercial mortgage calculator to model payments under both structures.
How does a variable rate commercial mortgage work?
A variable-rate commercial mortgage has three core components that determine your interest rate at any given time: the index, the spread, and the reset frequency.
The Index (SOFR)
The index is the benchmark rate your loan references. For virtually all new commercial floating-rate loans in 2026, this is Term SOFR, published by the CME Group based on overnight Treasury repurchase agreement transactions. As of February 2026, 1-month Term SOFR is approximately 3.65%.
The Spread
The spread is the fixed margin your lender adds on top of the index. It stays constant for the life of the loan. A bridge lender might price at SOFR + 350 bps, meaning if SOFR is 3.65%, your all-in rate is 7.15%. The spread reflects the lender's assessment of risk: lower leverage, stronger sponsors, and better properties earn tighter spreads.
The Reset Frequency
Most commercial floating-rate loans reset monthly based on the 1-month Term SOFR rate. Some products reset quarterly. Each reset recalculates your interest rate using the current index value plus your fixed spread.
Here is a practical example. Suppose you close a $5 million bridge loan at SOFR + 300 bps in February 2026:
- Starting rate: 3.65% + 3.00% = 6.65%
- Monthly interest-only payment: $27,708
- If SOFR drops to 3.00% in 6 months: rate falls to 6.00%, payment drops to $25,000
- If SOFR rises to 4.25%: rate increases to 7.25%, payment climbs to $30,208
That swing of over $5,000 per month illustrates both the opportunity and risk of floating-rate debt. For borrowers on interest-only bridge loans, the variability in payment directly impacts cash flow and return projections.
As noted in our recourse vs non-recourse loan guide, floating-rate bridge loans are often structured as non-recourse with bad-boy carve-outs, which limits personal liability but may require additional credit enhancements like rate caps.
When should you lock in a fixed rate on a commercial loan?
Timing a rate lock is part analysis and part risk management. You cannot predict interest rates with certainty, but you can evaluate the conditions that favor locking in.
Lock in a fixed rate when:
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The yield curve is steep and rising. When long-term rates are climbing, locking early prevents you from chasing higher rates. The 10-year Treasury rose from 3.60% to 4.26% between September 2024 and February 2026, a move that added 50+ basis points to fixed commercial mortgage rates.
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Your property is stabilized. Once you have completed renovations, leased up, and achieved target occupancy, transitioning from a floating-rate bridge loan to a fixed-rate permanent loan locks in your returns and removes rate risk.
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Rate lock windows are available. Most permanent loan programs allow you to lock your rate 30-90 days before closing. CMBS and agency lenders sometimes offer extended rate locks of 60-120 days, though these may come with a small premium.
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Your breakeven analysis favors it. Calculate the "breakeven rate" at which a floating-rate loan would cost the same as a fixed-rate loan over your projected hold period. If SOFR would need to drop significantly below current levels for floating to win, the fixed rate offers better risk-adjusted value.
Consider waiting if:
- The Fed has signaled additional rate cuts and forward markets support declining short-term rates
- You are still in the value-add phase with a planned refinance 12-24 months away
- The spread between fixed and variable rates is unusually wide, indicating the market is pricing in rate declines
Talk to a Clearhouse Lending advisor about rate lock timing and options for your next deal.
What are the risks of a variable rate commercial loan?
Variable-rate commercial loans carry several risks that borrowers must understand and plan for before closing.
Payment Volatility
Your monthly debt service fluctuates with the index. On a $10 million loan at SOFR + 300 bps, every 100 basis point increase in SOFR adds approximately $100,000 per year in interest expense. Over a 3-year bridge loan term, a sustained 200 bps rise could cost an additional $600,000.
DSCR Erosion
Rising rates shrink your debt service coverage ratio, which can trigger loan covenant violations. If your NOI is $1.2 million and your initial annual debt service is $800,000 (DSCR of 1.50x), a rate increase pushing debt service to $1 million drops your DSCR to 1.20x, potentially below lender minimums of 1.25x.
Refinance Risk
If rates rise sharply during your loan term, refinancing into a permanent loan at maturity may be more expensive than you projected. The property may not support the higher debt service at the elevated rate, forcing you to bring additional equity or accept less favorable terms. According to CBRE's 2026 U.S. Real Estate Market Outlook, approximately $1.2 trillion in commercial mortgages are maturing in 2025-2026, and borrowers who took on floating-rate debt at lower rates may face rate shock at refinance.
Negative Leverage
If your all-in borrowing cost exceeds your property's capitalization rate, you enter negative leverage territory. This means the debt is diluting your equity returns rather than enhancing them. In a rising rate environment, a property purchased at a 6% cap rate with a floating-rate loan that climbs to 7.5% will experience negative leverage.
Cap Expiration Risk
Many floating-rate lenders require borrowers to purchase interest rate caps (discussed below), but these caps have defined terms, often 2-3 years. If your loan extends beyond the cap's expiration, you face uncapped rate exposure or must purchase a replacement cap, potentially at a much higher cost.
How do rate caps and floors work on variable rate loans?
Interest rate caps and floors are hedging instruments that set boundaries on how much your floating rate can move.
Interest Rate Caps
An interest rate cap is a financial derivative that pays the borrower the difference between the actual index rate and a predetermined strike rate whenever the index exceeds the strike. In practice, it functions as an insurance policy against rate spikes.
For example, if you purchase a SOFR cap with a strike of 4.50% and SOFR rises to 5.50%, the cap provider pays you the 1.00% difference on your notional loan amount. Your effective SOFR exposure is capped at 4.50%, so your all-in rate (SOFR cap + spread) never exceeds a known ceiling.
Most bridge lenders require borrowers to purchase rate caps as a condition of closing. The key terms include:
- Notional amount: Matches or approximates your loan balance
- Strike rate: The SOFR level at which protection kicks in (typically 100-200 bps above current SOFR)
- Term: Usually matches the initial loan term (2-3 years)
- Cost: Determined by volatility, time to expiration, and the distance between current SOFR and the strike
As of February 2026, rate cap costs have moderated compared to the elevated pricing seen in 2022-2023 when rate volatility was at its peak. A 3-year SOFR cap with a 4.50% strike on a $10 million notional might cost approximately $75,000-$150,000, depending on market conditions. However, cap costs can change quickly based on interest rate volatility, as noted by Chatham Financial.
Interest Rate Floors
A floor sets the minimum index rate for your loan, regardless of how low SOFR actually falls. Most floating-rate commercial loans include a SOFR floor of 0.00-1.00%. If your loan has a SOFR floor of 1.00% and SOFR drops to 0.50%, your rate is calculated using 1.00% as the index, not 0.50%.
Floors protect the lender's minimum yield and are generally non-negotiable. They limit the borrower's downside benefit but are usually set low enough that they only become relevant in a severe rate-cutting cycle.
How do you compare the total cost of a fixed vs variable rate loan?
The most effective way to compare rate structures is to model total interest cost across multiple SOFR scenarios over your projected hold period.
Consider a $5 million commercial mortgage with a 5-year hold period:
Scenario 1: Fixed at 6.25%
- Annual interest cost: $312,500 (interest-only)
- Total 5-year interest: $1,562,500
- Cost certainty: 100%
Scenario 2: Variable at SOFR + 250 bps (starting at 6.15%)
- If SOFR stays flat at 3.65%: Total 5-year interest = $1,537,500 (savings of $25,000)
- If SOFR drops 100 bps to 2.65%: Total 5-year interest = $1,287,500 (savings of $275,000)
- If SOFR rises 100 bps to 4.65%: Total 5-year interest = $1,787,500 (added cost of $225,000)
The breakeven point in this example is a SOFR increase of approximately 10 basis points. If you believe SOFR will remain flat or decline, the variable option saves money. If you think rates will rise even modestly, the fixed rate protects you.
Also factor in prepayment flexibility. Fixed-rate loans, especially CMBS and agency products, carry defeasance or yield maintenance penalties that can cost 3-10% of the loan balance if you exit early. Most floating-rate loans allow prepayment with minimal or no penalty, which is a significant advantage if your strategy involves selling or refinancing before maturity.
For a deeper dive into loan terms and what to negotiate, review our commercial loan term sheet guide.
What questions should you ask your lender about rate structure?
Before committing to a rate type, ask your lender these questions to avoid surprises:
- What index does the variable rate reference? Confirm it is Term SOFR, not a proprietary index or outdated benchmark.
- What is the rate cap requirement? Understand the required strike rate, term, and whether you can choose your cap provider.
- Is there a SOFR floor? Know the minimum index rate built into the loan.
- What are the prepayment terms? Fixed-rate loans often carry yield maintenance or defeasance. Get the exact formula.
- Can I convert from variable to fixed? Some lenders offer conversion options mid-term.
- What is the rate lock period and cost? For fixed-rate loans, confirm when the lock starts and whether there is a lock extension fee.
- How does the rate affect my DSCR covenant? Understand whether the lender stress-tests your DSCR at a higher rate.
- What happens if my rate cap expires before the loan matures? Confirm replacement cap requirements.
Schedule a consultation with Clearhouse Lending to get answers tailored to your specific deal.
What are the most common questions about fixed and variable rate commercial loans?
Can I switch from a variable rate to a fixed rate during my loan term?
Some bank lenders offer built-in conversion options that let you switch from floating to fixed at a predetermined point, typically for a small fee. CMBS and bridge lenders generally do not offer this feature. If conversion is important to you, negotiate it upfront in the term sheet.
What is SOFR and why did it replace LIBOR?
SOFR (Secured Overnight Financing Rate) is a benchmark published by the Federal Reserve Bank of New York based on overnight Treasury repurchase agreements. It replaced LIBOR because LIBOR relied on estimated, self-reported rates rather than actual transactions. SOFR is backed by approximately $1 trillion in daily transaction volume.
Are commercial mortgage rates higher than residential rates?
Yes. Commercial mortgage rates typically run 50-200 basis points higher than comparable residential rates. As of February 2026, the 30-year residential fixed rate averages approximately 6.11% (per Freddie Mac), while commercial fixed rates start around 5.18% for agency multifamily but range to 7.50% or higher for other property types and higher-leverage structures.
What is a rate lock float-down?
A float-down provision lets you lock a fixed rate but reduce it if market rates decline before closing. Not all lenders offer this, and it may require an upfront premium.
How much does an interest rate cap cost in 2026?
For a $10 million loan with a 3-year term and a SOFR strike of 4.50%, costs in early 2026 typically range from $75,000 to $150,000. Caps become more expensive when rate volatility increases or when the strike rate is set closer to the current SOFR level.
Do all variable-rate commercial loans require rate caps?
Not all, but most. Bridge lenders and CMBS floating-rate lenders almost universally require borrowers to purchase rate caps. Bank lenders on recourse floating-rate loans may waive the cap requirement, relying instead on the personal guarantee and DSCR covenants to manage rate risk.
Sources: Federal Reserve Bank of New York (SOFR data), Freddie Mac Primary Mortgage Market Survey (February 2026), Chatham Financial (swap and cap rate data), CBRE 2026 U.S. Real Estate Market Outlook, Federal Reserve Board H.15 Selected Interest Rates, Commercial Loan Direct (February 2026 rate survey).