SOFR Swap Rates: How Fixed-Rate CRE Loans Are Priced

A SOFR swap rate is the fixed rate one party pays in exchange for compounded SOFR over a set term, priced so the swap is worth zero on the trade date, and it is one of two base rates under fixed-rate CRE debt: the coupon is a swap or Treasury rate of matching term plus a credit spread. The coupon is the wrong place to compare a fixed-rate loan, a swapped floater and a capped floater. Compare them on total cost including the exit, because that is where the three differ most.

What a SOFR swap rate is

In a plain vanilla SOFR swap, one side pays a fixed rate and the other pays compounded SOFR on the same notional for the same term. The ARRC’s user’s guide to SOFR describes how the fixed rate is set: so that the value of receiving the fixed rate equals the value of receiving the floating rate when the swap is traded. That makes the swap rate the market’s price for compounded SOFR over the term, which in practice means the SOFR forward curve averaged into one number.

Two consequences follow. A 5-year swap rate below the current SOFR fixing means the market is pricing SOFR lower, on average, over those five years; a swap rate above it means the reverse. And the swap rate moves every day with the curve, so any fixed rate quoted off it is good only until it is locked.

For a published reference point, ICE Benchmark Administration publishes the USD SOFR ICE Swap Rate each business day for tenors from 1 to 30 years. Lenders and hedge providers quote from live markets, so treat any published setting as a benchmark and ask for the rate actually being locked. See interest rate swap in the glossary for the cash flows.

How lenders price fixed-rate CRE loans

A fixed coupon has two parts that move for different reasons.

The index. A market rate of matching term: a Treasury yield or a swap rate. It moves daily and nobody at the lender controls it. Freddie Mac’s fixed-rate multifamily loans, for example, are priced off a Treasury index. Its Index Lock option lets an eligible borrower lock the Treasury yield after a signed application reaches Freddie Mac, with the spread locked later at full rate lock (May 2025 term sheet).

The credit spread. The lender’s price for the property, the loan-to-value, the sponsor, the term and the prepayment structure. It moves with the lender’s appetite and with credit markets, and it can move while the index does not. In the Freddie Mac Index Lock, the spread is not subject to market grid movements during the lock but can still change if loan terms, the property, the borrower or the documents change.

A bank that prefers to lend floating can deliver the same economics a different way: a SOFR loan paired with a pay-fixed swap. The swap is a separate contract, often with the lending bank, and the ISDA Master Agreement is the standard contract that governs over-the-counter derivatives such as this one. The result is a synthetic fixed rate: swap rate plus loan spread.

Illustrative example: two routes to a five-year fixed rate on $30 million (invented rates; annual interest simplified to balance times rate)

The coupons sit 5 basis points apart: $15,000 a year. Check each route’s day count too, since the same coupon costs more over a year on actual/360 than on 30/360. The exit terms differ by far more. Yield maintenance falls toward zero, or toward a minimum in the documents, when Treasury yields rise above the coupon, but it never pays the borrower. Swap breakage runs both ways. If rates have fallen since the swap was struck, the borrower pays the swap’s negative value; if rates have risen, the swap is an asset and the borrower receives it. Owners who expect to sell or refinance early should price the exit before choosing the route. See commercial prepayment penalty types.

Swap vs cap on a floating-rate loan

On a floater, the hedge choice is usually a swap or a cap, and the loan documents often decide it before the borrower does. Agency and bridge floaters typically require a cap; bank loans often require or allow a swap. Where there is a choice, the trade-off is direct:

• A swap fixes the rate with no upfront premium. The cost is built into the fixed rate, and the borrower gives up the benefit if SOFR falls.
• A cap costs an upfront premium, sets a ceiling on SOFR and keeps the benefit if SOFR falls. It may expire before the loan and need replacing.

Illustrative example: a $30 million, three-year floater at SOFR plus 2.50%, hedged three ways, with SOFR held constant for the year (invented rates; annual interest simplified to balance times rate)

The cap premium is spread evenly over the three years, $100,000 a year, or 0.333% of the balance. The capped loan costs less than the swapped loan whenever SOFR averages below about 3.27% (3.60% minus 0.333%). Above the 4.50% strike, the capped loan costs a fixed 7.00% plus the premium, $370,000 a year more than the swap.

The forward curve settles which outcome the market is pricing. The swap rate is the curve’s average, so a swap at 3.60% means the market is pricing compounded SOFR to average about 3.60% over the three years. Choosing the cap is a bet that SOFR averages meaningfully below the swap rate, paid for with the premium and with the gap between the swap rate and the strike if rates rise. What that premium costs, and why, is in interest rate cap cost.

Exit: breakage against residual value

The hedge outlives plans. A property sold in year two leaves a hedge with value to settle.

A swap’s mark-to-market is the present value of the fixed-versus-floating difference over the remaining term. It can be a large liability after rates fall. A cap’s mark-to-market is never negative for the borrower who owns it: the cap has residual value, sometimes a lot, sometimes nearly none. Neither is visible on the loan statement. Both belong in the disposition model and in the lender’s hedge requirements file. See hedge requirements, replacement caps and mark-to-market.

What to track

• Index and spread separately on every fixed-rate loan and every swap: what was locked, when, and at what level.
• Swap terms: notional schedule against the loan’s amortization, maturity against loan maturity, counterparty, and the ISDA and confirmation terms.
• Swap mark-to-market at least monthly, since it is a liability or an asset in any sale or refinancing decision.
• Prepayment cost on each fixed-rate loan under its convention, next to swap breakage on the swapped loans, so exit costs compare like for like.
• Hedge requirements in the loan documents: instrument allowed, strike or fixed-rate limit, replacement dates.
• Fixed, swapped and capped share of the portfolio, and how much floating exposure is unhedged above each cap strike.

How this looks in LoanBoss

LoanBoss models every prepayment type on each loan, including yield maintenance, defeasance and swap breakage, and calculates prepayment costs in real time with the ability to project them to a future date. Hedges carry real-time rates and precise settlement calculations for reconciliation, and hedge requirements are tracked with live mark-to-market values and replacement cap costs. Critical dates, including replacement caps and prepayment changes, come with alerts.

Frequently Asked Questions

Key takeaways

• A SOFR swap rate is the fixed rate worth the same as compounded SOFR over its term, the forward curve averaged into one number.
• Fixed CRE coupons are an index (Treasury or swap of matching term) plus a credit spread; the two move for different reasons and can be locked at different times.
• A fixed-rate loan and a swapped floater can land within a few basis points on coupon and far apart on exit cost.
• Yield maintenance never pays the borrower; swap breakage runs both ways.
• A cap beats a swap only if SOFR averages below the swap rate by more than the annualized premium, and it costs more above the strike.

Related reading

• SOFR forward curve
• Interest rate cap cost
• Hedge requirements, replacement caps and mark-to-market
• What is yield maintenance?
• Real-time prepayment calculations
• Interest rate swap and ISDA in the glossary

A fixed rate is an index plus a spread with an exit attached. LoanBoss calculates prepayment costs, swap breakage included, for any date.