Current Interest Rate

Definition of Current Interest Rate

The current interest rate in the context of a commercial mortgage is the percentage of the principal loan amount charged by a lender to a borrower for the use of capital to purchase, refinance, or develop commercial real estate. Unlike residential mortgages, which often follow standardized national trends, the current rate for a commercial loan is highly individualized, reflecting the real-time market cost of funds plus a risk premium specific to the property and the borrower.

Detailed Description of Commercial Interest Rates

In commercial lending, the interest rate is rarely a single, static number applied to all applicants. Instead, it is a calculation based on several moving parts. The current interest rate is generally comprised of two primary components: the index (the base cost of capital) and the spread (the lender’s profit and risk margin).

Factors that determine the current interest rate for a specific commercial mortgage include:

• Market Benchmarks: Most commercial rates are tied to an underlying index such as the Secured Overnight Financing Rate (SOFR) for floating-rate loans, or the 10-Year Treasury Yield for fixed-rate long-term loans.
• Property Type: Lenders view different asset classes with varying levels of risk. For example, industrial and multifamily properties often command lower interest rates than hospitality or office buildings due to perceived stability.
• Debt Service Coverage Ratio (DSCR): This is a measure of the property's ability to cover the mortgage payments through its annual net operating income. A higher DSCR typically results in a lower interest rate offer.
• Loan-to-Value (LTV) Ratio: The amount of the loan compared to the appraised value of the property. Lower LTV ratios (meaning more equity from the borrower) generally lead to more favorable current interest rates.
• Creditworthiness: The financial strength, liquidity, and experience of the borrowing entity or the individual guarantors play a significant role in the final rate determination.

Fixed vs. Floating Rates

The current interest rate can be structured in two primary ways:

• Fixed Rate: The interest rate remains the same for the duration of the loan term (e.g., 5, 7, or 10 years). This provides the borrower with predictable debt service regardless of market fluctuations.
• Floating (Variable) Rate: The rate fluctuates periodically based on changes to the underlying index. While often starting lower than fixed rates, floating rates carry the risk of increasing if market conditions change.

Because commercial market conditions change daily, a current interest rate quote is typically time-sensitive and may require a "rate lock" agreement to remain valid during the underwriting and closing process.