Q&A with June Fish of Ashworth Mortgage Corp.

June Fish, Ashworth Mortgage Corp.

What does "floor rate" mean?

A floor rate is the least amount of interest a lender may charge on a note once a loan is locked and/or closed. For example, a loan application will indicate that the rate of interest on the loan. This rate of interest is the sum of the index- i.e. Treasury, FHLBB, LIBOR, whatever - plus a number of basis points.

Additionally, the language in the application may go on to say that the "loan shall be subject to a floor interest rate of X%." This floor rate limits the lender's exposure to interest rate erosion due to a subsequent falling index.

What is important to this floor concept is that a borrower should always make certain that the floor rate at the time of the application is 25 basis points or more lower than what the actual rate is at the time of the application and again at commitment. This review will insure that the borrower has a cushion on the floor rate and the opportunity to benefit from any downward movement in the index, and thereby the interest rate.

The floor rate is negotiable and should be a focal point of any professional reading the application. In the past, floor rates were most common in fixed rate transactions, but given the state of the marketplace today, they are quite common in floating rates.

Send your questions to info@ashworthmortgage.com.

June Fish is a commercial real estate broker with Ashworth Mortgage Corp., Newton, Mass.