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
Related Programs and Tools
Frequently Asked Questions
What replaced LIBOR?
SOFR, the Secured Overnight Financing Rate, replaced LIBOR as the main benchmark for floating-rate commercial loans in the United States.
How do I protect against rising SOFR?
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.