Lock fixed when hold is 5+ years and exit is uncertain timing. Float when hold is 1 to 3 years (bridge) or you have a defined exit within 24 to 36 months. Mid-range (3 to 5 years): depends on the rate cap economics and prepayment menu. Always model the all-in cost over realistic hold scenarios.
Decision factors in order of importance
Hold horizon. Long hold = fixed. Short hold = floating. Mid-range = depends.
Exit certainty. Defined exit (sale to identified buyer, agency take-out at stabilization) = floating, since the prepayment cost on fixed could exceed the rate-savings benefit. Uncertain exit = fixed, for the predictability.
View on rates. Borrower expects rates to fall = floating (capture the decline). Borrower expects rates to rise = fixed (lock the current rate). Honest disclaimer: the rate forward curve is the consensus; don't bet against it without a thesis.
Asset/program constraint. Many bridge programs are floating-only. Many agency/CMBS perm programs are fixed-only. The decision is often pre-made by the property's stage and the lender options.
Floating: when it's the right answer
Bridge / value-add / lease-up. Hold horizon 1 to 3 years; exit defined; flexibility on prepayment matters more than headline rate.
Construction. Most construction loans are floating during construction with a fixed-rate take-out at stabilization. The construction-period interest is floating because no one knows exactly when the building will deliver and convert.
Stabilized property where the sponsor has a defined sale or refi within 24 to 36 months and the prepayment cost on fixed would dominate.
Fixed: when it's the right answer
Long-hold permanent debt on stabilized property. 5/7/10/15-year fixed-rate non-recourse perm. The whole point is predictable debt service for the planned hold.
Sponsors who can't tolerate rate-volatility risk in their underwriting. Funds with fixed-rate-locked underwriting commitments to investors.
Periods when the forward curve suggests rates will be higher than current, locking fixed captures the current rate.
Rate cap economics on floating
Most floating-rate bridge requires a rate cap. Cost depends on notional, strike, and term. As rough order of magnitude in 2026: a 3-year cap on $20M with a strike 100 bps above current SOFR runs $300K to $600K. Capitalized into reserves at closing.
The cap protects coverage. It does not eliminate rate risk on cash flow, even with the cap, rising SOFR within the strike means rising debt service and falling DSCR. Stress-test bridge underwriting at the cap strike, not at the current rate.
Worked comparison, 5-year hold
Option A, fixed: $20M 5-year fixed at 5.75%, yield maintenance prepayment, 30-year am. Annual debt service ~$1.4M.
Difference: ~$200K/year in current debt service for the floating, in exchange for full prepayment flexibility. Whether floating wins depends on (a) the trajectory of SOFR over the hold and (b) whether the borrower will actually use the prepayment flexibility.
If the borrower is highly likely to refi or sell before year 5, floating + early payoff often beats fixed + yield maintenance. If the borrower will hold the full 5 years, fixed wins.
Frequently asked questions
Should I always buy a rate cap on floating?
If a cap is optional, compare its quoted cost, strike, term and coverage with the borrower’s exposure and cash-flow tolerance. Do not assume the premium is small or that every cap provides the same protection.
Can I switch from floating to fixed mid-loan?
Some lenders offer a one-time switch option (typically with a fee). More commonly, you refinance the floating into a new fixed-rate loan when ready, at the prevailing fixed-rate market.
How much does fixed-rate certainty cost vs. floating today?
Fixed perm in 2026 is typically 50 to 125 bps below floating bridge of comparable leverage. The trade is predictable rate vs. flexibility on exit. Worth running both through a 2-, 3-, and 5-year hold scenario.
Sources
- Treasury Constant Maturity Series (DGS5, DGS10) · Federal Reserve Bank of St. Louis (FRED) · weekly
- Secured Overnight Financing Rate (SOFR) · Federal Reserve Bank of New York · daily
- Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations · Mortgage Bankers Association · 2026-Q1
- Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) · Board of Governors of the Federal Reserve System · 2026-Q1