Fixed vs Floating Rate Apartment Loans: How to Choose for Your Business Plan
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A fixed rate apartment loan keeps the same interest rate for its term, so the payment is known, but repaying it early usually costs a prepayment penalty such as yield maintenance or defeasance. A floating rate loan resets with an index, usually SOFR (the Secured Overnight Financing Rate) plus a fixed spread, so the payment moves with the market, but it is usually cheaper to repay early. The choice follows the business plan: fixed rate fits a long hold of a stabilized building, floating rate fits a short value-add hold with an early sale or refinance, as long as the deal still works if rates rise to the loan's cap.
This post is part of our guide to real estate syndication. It compares the two on one example loan. Figures are as of November 2026; the rates are illustrations, not quotes.
How do they compare?
| Question | Fixed rate | Floating rate |
|---|---|---|
| Rate | Set at closing for the term | Index (usually SOFR) plus a spread, reset regularly |
| Payment | Known in advance | Changes with the index |
| Rate protection | Built in | Interest rate cap, bought by the borrower |
| Early repayment | Often yield maintenance, defeasance or a step-down | Often a short lockout or small fee, then open |
| Typical use | Stabilized buildings, longer holds | Value-add, bridge loans, shorter holds |
| Main risk | Paying a large penalty to sell or refinance early | Rates rising faster than income |
Terms vary by lender and program. Agency programs offer both types; bridge loans are almost always floating. See apartment loan types compared.
A worked example: one loan, three rate paths
A sponsor is borrowing $7,000,000 for a 4 year value-add plan. The lender offers either a 10 year fixed rate loan at 6.25% with yield maintenance, or a floating rate loan at SOFR plus 2.50% with a small exit fee after year 1. Both are interest-only for simplicity. The figures are an example.
| SOFR over the hold | Floating rate | Floating interest a year | Fixed interest a year |
|---|---|---|---|
| 3.00% | 5.50% | $385,000 | $437,500 |
| 4.00% | 6.50% | $455,000 | $437,500 |
| 5.00% | 7.50% | $525,000 | $437,500 |
If rates stay low, floating saves $52,500 a year. If they rise, it costs up to $87,500 a year more, until the rate reaches the cap's strike.
Now add the exit in year 4. The floating loan's exit fee is small and known. The fixed loan's yield maintenance depends on rates at the time: if rates have fallen below the loan's rate, the penalty can be large, because the lender is paid for the interest it loses on the remaining 6 years. That penalty comes out of sale proceeds, which belong to the investors. See prepayment penalties: yield maintenance and defeasance.
The lesson: over a 4 year hold, the fixed loan is not "safe" by default. It swaps payment risk for exit risk.
When does fixed rate fit?
- The building is stabilized and the plan is a long hold, close to the loan's term.
- Distributions must be steady and predictable.
- The prepayment penalty has a step-down, or the plan never needs to sell before the penalty is small.
- The loan can be assumed by a buyer, which can help a sale even with a penalty in place.
When does floating rate fit?
- The plan is a 2 to 5 year value-add with a sale or refinance at the end.
- The renovation will raise income enough to cover a higher payment.
- The deal still covers its payment at the cap's strike rate, with room to spare.
- The sponsor has budgeted for replacing the cap if the loan is extended. See interest rate caps.
Floating rate debt hurt many value-add deals bought in 2021 and 2022, when rates rose quickly and replacement caps became expensive. That history is a reason to stress test, not a reason to rule floating rate out.
How to decide, in five checks
- Write down the hold period and exit. Sale, refinance or long hold, and when.
- Price the exit on each loan. The fixed loan's penalty at that date under a few rate scenarios, and the floating loan's fee.
- Price the protection. The cap's cost now and the cost to replace it if you extend.
- Stress test the payment. DSCR and distributions on the floating loan at the cap's strike rate. See sensitivity analysis.
- Size both. The two loans may come in at different amounts on the lender's tests. See how lenders size an apartment loan.
How DoorRaise fits in
DoorRaise does not lend or arrange loans. It helps sponsors raise the equity for apartment buildings with 5 or more units from their friends and followers, and computes the deal page's projections from the sponsor's loan terms. DoorRaise forms the deal's LLC, prepares the offering documents, which describe the loan for investors, files Form D and verifies every investor's accreditation, in 506(b) and 506(c) deals. Investors fund by wire into escrow at Enterprise Bank & Trust. DoorRaise charges two flat fees: $1,500 to set up (non-refundable) and $5,000 a year for administration, the first year paid at closing from the money raised and only if the deal closes.
Run both loans through the free cap rate and DSCR calculator, then start your deal.
FAQ
Is a fixed or floating rate better for an apartment loan?
Neither is better in general. Fixed rate suits long holds of stabilized buildings; floating rate suits short value-add holds that will sell or refinance early. Compare the total cost over your real hold period.
What index do floating rate apartment loans use?
Most use SOFR, the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York, plus a fixed spread set in the loan.
Why do floating rate loans require a rate cap?
The cap limits how high the index can push the interest cost, which protects the lender and the borrower if rates rise. The borrower usually pays for it.
Can I pay off a fixed rate apartment loan early?
Usually yes, but often with a prepayment penalty such as yield maintenance, defeasance or a step-down percentage. The loan documents set the amount.
Do investors care which rate type the deal uses?
They should. The rate type decides whether distributions can fall if rates rise and how much a sale or refinance can cost. The offering documents should describe it.
Sources
- Federal Reserve Bank of New York, Secured Overnight Financing Rate data
- Fannie Mae Multifamily, fixed-rate mortgage loans
- Freddie Mac Multifamily, fixed-rate loan term sheet
This article is general information, not legal, tax or investment advice. The example loan and rates are illustrative. DoorRaise is not a lender, law firm, broker-dealer, investment adviser or funding portal.