Fixed vs. Variable Rate: How to Choose
Fixed rates give you certainty. Variable rates give you savings when rates drop. Learn how each works, compare real scenarios on a $1M loan, and use our 5-step decision framework to choose.
Fixed vs. Variable Rate: How to Choose for Your Commercial Loan
The fixed-vs.-variable decision is one of the highest-impact choices in any commercial loan. On a $1 million loan over 10 years, the difference can add up to $50,000 or more -- in either direction. Fixed rates buy certainty. Variable rates buy upside when rates fall. Neither is universally better; the right choice depends on your loan term, risk tolerance, cash flow profile, and view on where rates are headed.
How Each Works
Fixed Rate
Your interest rate is locked at origination and does not change for the life of the loan (or the fixed-rate period, if the loan has a reset). Your monthly payment stays the same regardless of what happens to the Fed, the economy, or the rate market.
Common fixed-rate commercial products:- SBA 504 (CDC portion): 20-year fixed, tied to 10-year Treasury at debenture sale
- Conventional commercial mortgage: 5, 7, or 10-year fixed term (may reset or balloon)
- CMBS: 5, 7, or 10-year fixed term
Variable Rate
Your interest rate floats above a benchmark (Prime or SOFR) and adjusts periodically -- quarterly for most SBA 7(a) loans, monthly for some SOFR-based products. When the benchmark rises, your payment goes up. When it falls, your payment goes down.
Common variable-rate commercial products:- SBA 7(a): Variable, adjusts quarterly, tied to Prime
- Bank lines of credit: Variable, often tied to Prime or SOFR
- Bridge loans: Variable, tied to SOFR or Prime
- Some conventional commercial mortgages: Variable option available
Rate Comparison: Current Market (May 2026)
| Loan Structure | Benchmark | Current All-In Rate Range | Adjustment Frequency |
|---|---|---|---|
| Variable (SOFR-based) | SOFR ~3.66% | ~5.81% - 7.66% (SOFR + 2.15-4.00%) | Monthly or quarterly |
| Variable (Prime-based) | Prime 6.75% | ~7.75% - 8.75% (Prime + 1.00-2.00%) typical bank | Quarterly (SBA 7(a)) |
| SBA 7(a) variable | Prime 6.75% | ~9.00% - 13.00% (Prime + 2.25-6.25%) | Quarterly |
| Fixed (10-year term) | 10yr Treasury ~4.42% | ~6.17% - 6.92% (Treasury + 1.75-2.50%) | None |
| Fixed SBA 504 (CDC) | 10yr Treasury ~4.42% | ~5.85% - 6.50% | None (20yr fixed) |
| Fixed CMBS | 10yr Treasury ~4.42% | ~5.90% - 7.50% | None (term fixed) |
Scenario Comparison: $1 Million Loan
Let us compare the total cost of a $1M loan under three scenarios: rates stay flat, rates drop, and rates rise.
5-Year Comparison
| Scenario | Variable (SOFR + 2.50%, starting 6.16%) | Fixed (6.50%) | Difference |
|---|---|---|---|
| Rates stay flat | $337,800 total interest | $349,600 total interest | Variable saves $11,800 |
| Rates drop 100bp over 2 years | $307,400 total interest | $349,600 total interest | Variable saves $42,200 |
| Rates rise 100bp over 2 years | $368,200 total interest | $349,600 total interest | Fixed saves $18,600 |
| Scenario | Variable (SOFR + 2.50%, starting 6.16%) | Fixed (6.50%) | Difference |
|---|---|---|---|
| Rates stay flat | $614,500 total interest | $637,800 total interest | Variable saves $23,300 |
| Rates drop 100bp over 2 years, hold | $548,900 total interest | $637,800 total interest | Variable saves $88,900 |
| Rates rise 100bp over 2 years, hold | $680,100 total interest | $637,800 total interest | Fixed saves $42,300 |
| Scenario | Variable (Prime + 2.75%, starting 9.50%) | Fixed (6.50%) | Difference |
|---|---|---|---|
| Rates stay flat | $1,582,000 total interest | $937,400 total interest | Fixed saves $644,600 |
| Rates drop 200bp over 3 years, hold | $1,318,000 total interest | $937,400 total interest | Fixed saves $380,600 |
| Rates rise 100bp, hold | $1,712,000 total interest | $937,400 total interest | Fixed saves $774,600 |
When Fixed Wins (4 Scenarios)
1. Long loan terms (10+ years)
The longer your loan, the more exposure you have to rate volatility. Over 25 years, rates will go through multiple cycles. Fixed eliminates that uncertainty entirely.
2. Fixed rates are at or below variable rates (like now)
When you can lock a fixed rate that is lower than the current variable rate, you get both certainty AND a lower starting cost. This is the strongest case for fixed, and it exists in today's market.
3. Tight cash flow with no margin for payment increases
If your DSCR is at or near the minimum (1.25x), a 100bp rate increase on a variable loan could push you into cash flow stress. Fixed rates eliminate this risk.
4. You are risk-averse and value budgeting certainty
If knowing your exact payment for the next 10-20 years is worth more to you than potential savings from rate drops, fixed is the rational choice.
When Variable Wins (4 Scenarios)
1. Short loan terms (under 5 years)
On a 3-year bridge loan or short-term credit facility, the exposure to rate changes is limited. The lower starting rate on some variable products can save money over a short horizon without much risk.
2. Rates are clearly headed down
If the Fed is in an active cutting cycle (as in late 2024-2025), variable-rate borrowers capture each cut as it happens. The savings compound over time.
3. You plan to refinance or pay off early
If you expect to sell the property, refinance into permanent financing, or pay off the loan within 3-5 years, the variable rate gives you flexibility without long-term exposure. Variable loans also typically have less onerous prepayment penalties.
4. Strong cash flow with large DSCR cushion
If your DSCR is 1.75x or above, a 100-200bp rate increase is absorbable. The risk of variable rates is real but manageable, and you capture the upside of any future cuts.
Rate Cap Structures: The Middle Ground
If you want variable-rate upside but fear rate spikes, a rate cap provides a ceiling:
| Structure | How It Works | Cost |
|---|---|---|
| Interest rate cap (purchased) | You buy an over-the-counter derivative that pays you the difference if SOFR exceeds a specified strike rate. Common on bridge loans. | Premium paid upfront (varies by term, strike, notional) |
| Rate cap built into loan | Some lenders offer variable loans with a contractual maximum rate (lifetime cap). | Slightly higher spread to compensate lender |
| Rate floor + cap (collar) | Your rate floats between a floor and a cap. You give up some downside benefit in exchange for upside protection. | Usually embedded in loan pricing |
Hybrid Loan Structures
Some products combine fixed and variable elements:
| Structure | Description | Common Products |
|---|---|---|
| Fixed-to-variable | Fixed rate for an initial period (3, 5, or 7 years), then converts to variable | Some bank commercial mortgages |
| Variable-to-fixed | Starts variable with an option to lock a fixed rate at a specified point | Less common; some specialty products |
| SBA 504 hybrid | CDC portion is fixed (20yr); bank portion can be variable | Standard SBA 504 structure |
| Blended rate | Two tranches in the same loan: one fixed, one variable | Custom bank structures for larger deals |
Historical Performance: Fixed vs. Variable
Looking at the past 10 years illustrates the trade-off:
| Period | Fed Funds Range | Variable Rate Winner? | Fixed Rate Winner? |
|---|---|---|---|
| 2015-2016 | 0.25-0.75% | Variable (rates near zero) | -- |
| 2017-2018 | 1.25-2.50% | Variable (still low) | -- |
| 2019 | 1.50-2.50% | Mixed (mid-year cuts) | -- |
| 2020-2021 | 0.00-0.25% | Variable (emergency cuts, near-zero rates) | -- |
| 2022-2023 | 0.25-5.50% | -- | Fixed (dramatic rate increases) |
| 2024 | 4.50-5.50% | -- | Fixed (peak rates, variable very expensive) |
| 2025 | 3.50-4.50% | Variable (benefiting from cuts) | Mixed |
| 2026 YTD | 3.50-3.75% | Mixed (rates flat) | Fixed (lower starting rate) |
Decision Framework: 5 Steps
Step 1: Determine Your Loan Term
- Under 5 years: Variable is more defensible (limited exposure)
- 5-10 years: Either can work; depends on rate outlook and cash flow
- Over 10 years: Fixed is strongly favored (too much uncertainty over long horizons)
Step 2: Compare Starting Rates
- If fixed rate is lower than variable: Strong case for fixed (you get certainty AND savings)
- If variable rate is lower by 100bp+: Variable may win if you believe rates will stay flat or drop
- If rates are similar: Fixed wins on certainty alone
Step 3: Stress-Test Your Cash Flow
- Calculate your payment at variable rate + 200bp. Can your business handle it?
- If yes (DSCR stays above 1.25x): Variable is manageable
- If no: Fixed eliminates the risk entirely
Step 4: Assess Your Rate View
- Believe rates will drop 50bp+: Variable captures the savings
- Believe rates will stay flat: Whichever has the lower starting rate
- Believe rates may rise: Fixed protects you
- Uncertain: Fixed removes the guessing game
Step 5: Factor in Prepayment Plans
- Planning to sell or refi within 3-5 years: Variable offers more flexibility (fewer prepayment penalties)
- Holding for full term: Fixed gives predictability for the entire hold period
Key Takeaways
- In the current market, fixed rates are at or below variable rates for most commercial products. This is an unusual advantage for fixed-rate borrowers.
- For long-term loans (10+ years), fixed almost always wins in the current environment because the starting rate is lower and the exposure to future rate uncertainty is eliminated.
- Variable rates make sense for short-term loans (under 5 years), in active Fed cutting cycles, or when you plan to refinance or sell before the term ends.
- Rate caps provide a middle ground for variable-rate borrowers who want downside protection.
- The SBA 504 is a natural hybrid: fixed on the CDC portion, variable (or fixed) on the bank portion, giving you partial rate protection automatically.
- Do not try to time the market. Choose the structure that fits your cash flow, timeline, and risk tolerance -- not your prediction about what the Fed will do next.
Frequently Asked Questions
1. Can I switch from variable to fixed mid-loan?
Generally, no. Most commercial loans do not include a conversion option. To move from variable to fixed, you would need to refinance into a new fixed-rate loan. Watch for prepayment penalties on your existing variable loan.
2. What happens to my SBA 7(a) rate when the Fed cuts?
SBA 7(a) variable rates adjust quarterly (January, April, July, October) based on the Prime Rate. A 25bp Fed cut reduces Prime by 25bp, which flows through to your rate on the next quarterly reset. The reduction is automatic -- you do not need to request it.
3. Is there a floor on how low my variable rate can go?
Many variable-rate loans include a "rate floor" -- a minimum interest rate below which your rate cannot drop, even if the benchmark falls. Check your loan documents. Rate floors are common and can limit the benefit of Fed cuts.
4. How much does a rate cap cost?
Rate cap costs vary based on the notional amount, term, and strike rate. For a 2-year cap on $1M at a SOFR strike of 5.00%, expect to pay $5,000-$15,000 in premium. Costs increase with longer terms and lower (more protective) strike rates. Your lender or an interest rate broker can quote you.
5. What is the best rate structure for SBA loans?
SBA 504 delivers the best fixed rate in the SBA family (CDC portion at ~5.85-6.50%). SBA 7(a) is variable only (Prime + spread). If your project qualifies for 504 (owner-occupied real estate or heavy equipment), the 504 fixed rate is almost always superior to 7(a) variable.
6. Should I refinance my variable-rate loan into a fixed rate now?
If your current variable rate is significantly higher than available fixed rates (which is the case for many SBA 7(a) borrowers today), and you plan to hold the loan for 5+ more years, a refinance to fixed can save substantial money while eliminating rate risk. Run the numbers including prepayment penalties and closing costs.
7. What does "rate reset" mean on a fixed-rate loan?
Some "fixed" commercial loans are fixed for a period (5 or 7 years) and then reset to a new rate based on market conditions. This is different from a fully fixed loan (like SBA 504) where the rate never changes. Read your loan terms carefully -- a 5/25 commercial mortgage means 5 years fixed, then a reset (or balloon) at year 5.
Compare current fixed and variable rates for your deal on our rates page. Ready to apply? Submit your deal and get quotes for both structures so you can compare side by side. Sources: FRED (Federal Reserve Bank of St. Louis), Federal Reserve H.15 Statistical Release, Q2 2026 Commercial Loan Pricing surveys.
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