Floating Interest Rates

Floating Interest Rate: A floating interest rate, also known as a variable or adjustable rate, refers to an interest rate that can fluctuate over the term of the loan, line of credit, or bond. The rate is typically pegged to a benchmark interest rate such as LIBOR, Prime Rate, or a Treasury Index, and can increase or decrease with market fluctuations.

In the context of real estate financial modeling, floating interest rates can make forecasting more complex due to the uncertainty about future interest rates. It can introduce a degree of risk for both lenders and borrowers.

For borrowers, if interest rates rise, the cost of borrowing increases and vice versa. On the other hand, in an environment where interest rates are falling, borrowers may benefit from a lower cost of borrowing. For lenders, while higher interest rates mean they receive more interest income, an increase in rates can increase the risk of default if borrowers are unable to meet the higher interest payments. Conversely, if interest rates fall, the interest income the lender receives will decrease.