Index (Loan Index)
A published, market-based interest rate that an adjustable-rate or floating-rate loan is tied to. The lender adds a fixed margin to the index to set your actual rate, which moves as the index moves.
An index is the benchmark interest rate that a floating- or adjustable-rate loan tracks. Because the index is published by a third party and reflects the broader market, neither you nor the lender controls it — it's the objective component of your rate. The lender adds a fixed margin on top, and the two together produce your fully-indexed rate.
Your rate = Index + Margin
Common indexes in investor lending
- SOFR (Secured Overnight Financing Rate) — the dominant benchmark for adjustable commercial and investor loans since LIBOR was retired.
- Prime rate — used on many bank lines of credit and some bridge loans.
- Treasury yields (e.g., the 5- or 10-year) — referenced on some longer fixed and balloon structures, and in yield maintenance penalties.
How it works
On an adjustable DSCR loan or a floating hard money loan, the rate resets periodically (e.g., every 6 months) to the current index plus the fixed margin. When the index rises, your rate and payment rise at the next reset; when it falls, they drop — subject to any caps or floors in your note.
A worked example
A floating loan is priced at SOFR + 3.50%.
At close: SOFR 5.30% + 3.50% margin = 8.80% rate
Reset later: SOFR rises to 5.80%
New rate: 5.80% + 3.50% = 9.30%
The margin never changed — only the index moved, and it carried your rate with it.
How it's used in investor lending
Knowing your index tells you what drives your rate risk. A SOFR-indexed loan exposes you to short-term rate policy; a Treasury-indexed loan tracks longer-term yields. When comparing floating loans, compare both the index and the margin, and check for rate caps that limit how high the index can push you. Many investors lock a fixed rate precisely to avoid index movement during the hold.
This is general information, not financial advice.
Frequently asked questions
What's the difference between the index and the margin?
The index is a market-driven benchmark (like SOFR) that moves over time and that neither you nor the lender controls. The margin is a fixed number the lender adds on top, set at closing and unchanged for the life of the loan. Your rate is the sum of the two.
Which index do investor loans use?
SOFR is the most common benchmark for adjustable investor and commercial loans today, having replaced LIBOR. Bank lines of credit often use the prime rate, and some longer-term and balloon loans reference Treasury yields.
Does the index affect a fixed-rate loan?
Only at pricing. A fixed-rate loan is set off the index at closing and then never changes. The index matters on an ongoing basis only for adjustable or floating-rate loans, where the rate resets to the current index plus your margin.