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    SOFR (Secured Overnight Financing Rate)

    The benchmark rate that floating rate commercial loans price over, based on overnight Treasury backed borrowing.

    SOFR, the Secured Overnight Financing Rate, is a benchmark interest rate based on overnight loans collateralized by U.S. Treasuries. It replaced LIBOR as the standard reference rate for floating rate commercial loans in the United States, and it is published daily by the Federal Reserve Bank of New York.

    Floating rate loans price as SOFR plus a spread. If SOFR is 4% and the lender's spread is 3%, the borrower pays 7%. As SOFR moves with monetary policy, the loan payment moves with it, so borrowers on floating rate debt carry interest rate risk.

    Lenders often use a term SOFR, such as a one month or three month average, to smooth daily swings. Borrowers who want to limit exposure buy a rate cap, which sets a ceiling on how high the SOFR portion of the rate can climb.

    Formula
    Floating Rate = SOFR + Lender Spread
    Worked Example

    A bridge loan is priced at SOFR plus 350 basis points. With SOFR at 4%, the rate is 4% + 3.5% = 7.5%. If SOFR rises to 5%, the rate climbs to 8.5%.

    Why It Matters

    SOFR sets the base for most floating rate commercial loans, so it directly drives your payment. When SOFR moves, your rate moves, which is why many borrowers buy a rate cap to protect cash flow.

    Related Terms

    Bridge to Perm

    A financing path that uses a short term bridge loan first, then converts to permanent financing once the property stabilizes.

    Interest Only Period

    A stretch at the start of a loan when payments cover only interest, not principal.

    Amortization

    The schedule that repays a loan's principal over time through regular payments.

    Term Sheet

    A non binding summary of proposed loan terms a lender offers before formal underwriting.

    Related Programs & Tools

    Bridge LoansConstruction LoansCommercial Mortgage

    Looking for another term? Browse the full commercial lending glossary.

    Frequently Asked Questions

    SOFR, the Secured Overnight Financing Rate, replaced LIBOR as the main benchmark for floating rate commercial loans in the United States.

    Many floating rate borrowers buy a rate cap, which sets a ceiling on the SOFR portion of the rate. Lenders often require one on bridge and construction loans.

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