Basis Points (BPS)
A unit of measurement equal to one-hundredth of a percentage point (0.01%). 100 basis points equals 1%. Commercial real estate loan pricing is typically quoted in basis points over an index rate. For example, a spread of 250 basis points over SOFR means the rate is 2.50% above the current SOFR rate. Basis points eliminate ambiguity when discussing rate changes — a rate moving from 5% to 6% is a 100 basis point increase, not a 1% increase.
Related Terms
Spread
The margin added to a base index rate (such as SOFR or Treasury) to determine a loan's interest rate. For example, a loan priced at "SOFR + 250" has a 2.5% spread over the SOFR index. Spreads reflect credit risk, property type, leverage, and market conditions. Lower spreads indicate more favorable pricing.
SOFR (Secured Overnight Financing Rate)
The benchmark interest rate that has replaced LIBOR for floating-rate commercial real estate loans. SOFR is based on overnight repurchase agreement transactions and is considered more reliable than LIBOR. Floating-rate loans are typically priced as SOFR plus a spread, with rate caps often required to limit interest rate exposure.
Rate Lock
A commitment from a lender to hold a specified interest rate for a defined period while the loan is processed. Rate locks protect borrowers from interest rate increases during underwriting. They typically cost 0.5-1.0% of the loan amount for 30-60 day locks, with longer locks costing more. Some lenders offer "float-down" provisions if rates decline.
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