Floating Rate

A floating rate, also called a variable or adjustable rate, is an interest rate that changes periodically based on movements in an underlying benchmark rate such as the federal funds rate, LIBOR, or SOFR. Floating rates affect mortgages, business loans, bonds, and credit card interest.

Floating-rate instruments typically start with a lower rate than comparable fixed-rate products, making them attractive to borrowers who expect rates to fall or plan to repay the loan quickly. However, they carry the risk of payment increases if benchmark rates rise.

For mortgages, adjustable-rate loans (ARMs) often have an initial fixed-rate period of 3, 5, 7, or 10 years before adjusting. Rate caps limit how much the rate can increase per adjustment period and over the life of the loan, providing some protection against extreme rate hikes.