Secured Overnight Financing Rate (SOFR)
Last updated October 1, 2026
The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate. It reflects what banks and other firms pay to borrow cash overnight when they post US Treasury securities as collateral, in what is called the repurchase (repo) market. The Federal Reserve Bank of New York publishes SOFR each business day at about 8:00 a.m. Eastern Time, based on trillions of dollars of actual trades.
SOFR took over from LIBOR, the London Interbank Offered Rate, which was based partly on bank estimates and proved open to manipulation. US dollar LIBOR panels ended after June 30, 2023. Congress passed the LIBOR Act to move older contracts with no workable fallback, and the Federal Reserve picked SOFR-based replacements for them.
Because SOFR is an overnight rate, loans use it in a few forms:
- Daily Simple SOFR: the published daily rate applied to each day's balance.
- SOFR Averages: compounded averages over 30, 90 or 180 days, also published by the New York Fed.
- Term SOFR: a forward-looking one-, three-, six- or twelve-month rate published by CME Group. It is common in business loans because the rate is known at the start of each interest period.
A floating-rate loan adds a spread to the benchmark. If one-month Term SOFR is 4% and the spread is 3%, the borrower pays 7% for that month. Many loans also set a floor, a minimum the benchmark cannot go below.
Why it matters for lenders
Most floating-rate bridge loans, construction loans and larger business loans in the US are now priced off SOFR. The loan documents must name the exact version, the reset dates, any lookback period, the floor and a fallback if the rate is ever unavailable. Each of those choices changes the interest billed.
SOFR movements also change risk. When rates rise, payments on floating loans go up, and debt coverage ratios can drop below covenant levels. Lenders often require interest rate caps on large floating-rate real estate loans for this reason.
How it works in practice
A commercial real estate lender funds a $5 million interest-only bridge loan at one-month Term SOFR plus 3.5%, with a floor. Each month, on the lookback date set in the loan documents, the servicing system pulls the published rate, applies the floor and spread, and sets the new rate. The borrower's bill and the interest accrual update automatically.
When rates are entered by hand, mistakes creep in: the wrong reset date, a missed floor or a rate typed into one loan but not another. Across a portfolio, those errors add up to billing disputes and ledger breaks. Feeding the published rate into the loan system on a schedule removes the manual step.
Related terms
Interest-Only Loan
A loan where the borrower pays only the interest for a set period, so the principal balance does not go down. Interest-only terms are common on bridge, construction and fix-and-flip loans, where the borrower plans to repay from a sale or refinance. Payments are lower at first, but the full principal is still owed at the end.
Bridge Loan
A bridge loan is short-term financing that covers the gap until a borrower can get permanent financing, sell a property or finish a business plan. In commercial real estate, bridge loans often fund purchases or upgrades of properties that don't yet qualify for a long-term loan. They usually cost more and depend on a clear exit.
Construction Loan
A construction loan is short-term financing for building or substantially rebuilding a property. Instead of paying out the full amount at closing, the lender releases money in stages, called draws, as work is completed and verified. Borrowers usually pay interest only on the amount drawn, and the loan is repaid by a sale or a permanent loan.
Promissory Note
The borrower's signed, written promise to repay a loan. The note states the amount borrowed, the interest rate, the payment schedule, the maturity date and what happens on default. It is the core debt document in most loans. Other documents, such as a mortgage or security agreement, give the lender rights in collateral to back up that promise.
Loan Servicing
Everything a lender or servicer does to manage a loan after it closes, until it is paid off or written off. That includes billing, collecting and posting payments, handling escrow, sending statements, watching covenants and insurance, managing late payments and changes, and producing payoff figures. Servicing can be done in-house or by a third-party servicer.
Further reading
See how lenders put this into practice
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