Fixed versus floating debt across alternative holding periods

Compare fixed and floating debt across both interest-rate paths and exit dates. A floating proposal can cost more interest but less overall at an early sale if the fixed loan has a larger exit charge. The preferred offer can reverse when the hold extends.

The following is an invented five-year comparison on the same $5 million fully funded, interest-only balance. It is not a rate forecast or an agency product quotation. Principal stays at $5 million until payoff, so it cancels from the cost difference while remaining a real closing obligation.

Write the complete price of each route

Fixed proposal F has a 6.75% coupon and $50,000 of initial fees. Its assumed payoff charge is $200,000 at month 18, $100,000 at month 36, and zero at month 60. These are specified hypothetical quotes for those dates, not estimates of yield maintenance.

Floating proposal V has an index plus 2.75% margin and a 1% index floor. A separate cap with a 5% index strike covers the full balance for the entire five-year term and costs $80,000 upfront. Initial loan fees are another $50,000. V’s assumed payoff charge is $50,000 at months 18 and 36, and zero at month 60. No residual sale value of the cap is assumed at early payoff.

For the model only, cap settlements exactly match the loan’s index, notional, timing, and day-count exposure and are available when needed. Effective annual interest after cap settlements is therefore:

$5,000,000 × [min(max(index, 1%), 5%) + 2.75%]

A real cap is a separate agreement. For example, the Fannie Mae SARM summary distinguishes the adjustable loan from purchased cap protection. The hypothetical $5 million loan here is not represented as qualifying for that program. Its terms illustrate the comparison method only.

Use several stated paths without assigning probabilities

Assume each annual index level applies throughout that year. Month-18 payoff includes one full year and half of year two. The model uses simple annual interest and equal half-years, rather than claiming an actual/360 payoff calculation.

These paths are stress inputs, not likelihood statements. The rising path produces a 7.75% effective rate after cap settlements in years two through five, although the contractual uncapped loan payment can be higher when the index is 6%. The cap premium remains a separate cost.

Calculate interest, then add the date-specific exit expense

For the falling path at month 18, V’s net interest is $337,500 in year one plus $143,750 for half of year two, or $481,250. Adding $130,000 of upfront fees and cap cost and the $50,000 exit charge produces $661,250.

F’s interest for the same 18 months is $506,250. Its $50,000 initial fee and $200,000 exit charge increase the total to $756,250.

The totals include interest net of the modeled cap settlements, initial fees, cap premium, and the specified payoff charge. They exclude principal, taxes, property operations, and the time value of money. They are neither APRs nor total investment returns.

Identify where the ranking changes

At month 18, V is less expensive under all three paths shown. Under the rising path it pays $25,000 more interest than F, yet saves $150,000 of exit charge and pays $80,000 more upfront for the cap. The net advantage is $45,000.

At month 36, rising-path V instead costs $130,000 more. The fixed loan’s assumed exit charge has fallen, while V has accumulated additional interest and still carries its original cap premium. Under the flat path, V costs $30,000 more at month 36. Under the falling path, it remains $120,000 cheaper.

At maturity, both assumed exit charges disappear. The flat-path floating loan then costs exactly $80,000 more, reflecting the cap premium when its net coupon matched the fixed rate throughout. Under the rising path it costs $280,000 more; under the falling path it costs $270,000 less.

This is why a single assumed sale month can dominate a financing recommendation. The owner should identify which timing changes are plausible in the property’s actual leasing or sale plan and preserve the cost of those alternatives.

Check that the two exit paths are actually available

Read lockouts, notice requirements, minimum interest, breakage, cap assignment, and any payoff costs not included in the headline term sheet. A loan that cannot be prepaid at month 18 should not receive an invented monetary fee to make that exit appear available.

Actual products can offer different prepayment alternatives. Freddie Mac’s April 2026 floating-rate summary presents several lockout/prepayment choices and expressly says the summary does not replace the Guide. This supports examining the selected option; it does not make the hypothetical fee schedule above a Freddie Mac term.

If the floating cap expires earlier, add replacement cost and the period without coverage to the relevant path. If the cap settlement arrives after the loan payment, add the bridging liquidity. If principal amortizes, recalculate each interest period on its actual balance instead of multiplying a constant $5 million.

The useful decision is conditional: which proposal the owner can carry under each credible hold and rate path, and which date or expense would reverse the preference. Rate certainty has a price, and exit flexibility has a price; both belong in the same dated comparison.