What Is a Floor Interest Rate on a Loan?

A floor interest rate is the minimum rate a lender will charge on variable-rate loans, such as adjustable-rate mortgages (ARMs), HELOCs, reverse mortgages, and some auto and personal loans. Unlike fixed-rate loans, where the interest rate never changes, variable-rate loans fluctuate with the market—but they can’t fall below the floor rate.

Understanding floor rates is key to managing variable-rate loans. Read on to learn how they work and which types of loans they affect.

The basics of a floor interest rates

Floor interest rates ensure lenders don’t lose out when market rates drop, but it can prevent borrowers from fully benefiting from lower interest rates.

For example, if your HELOC has a floor rate of 4% and the market rate drops to 2%, your rate will stay at 4%, limiting your savings. Always check with your lender to understand how a floor rate might affect your loan terms and potential costs.

Floor interest rates are outlined in your loan agreement. It’s essential to review them carefully because they can minimize your savings on a variable-rate loan if the market rate drops.

Floor interest rates only apply to variable-rate loans. Fixed-rate loans are unaffected. We’ll dive into some of the specific types of loans and their floor rates below.

Home equity loan floor rates

Most home equity loans have fixed interest rates. This means the rate you start with is the one you keep from start to finish. So if you have a fixed-rate home equity loan, floor rates won’t matter.

But if you have a variable-rate home equity loan, where the rate can change frequently based on market conditions, you may have a floor rate. This will be the lowest interest rate you’ll ever pay on a loan, no matter how much market rates decrease. 

Some lenders might let you negotiate your floor rate, along with other loan terms, but many have set standards. 

Example

Let’s say you take out a $50,000 home equity loan with a fixed interest rate of 5%. In this case, you won’t have a floor rate because your rate will always be 5%. 

But now let’s say you happen to have a $50,000 home equity loan with a variable rate. The rate is determined by a benchmark that’s at 5% plus a 1% margin when you take out the loan, so your starting interest rate is 6%. 

Over time, if the benchmark drops to 2%, your interest rate should be 3% (benchmark + margin). But if your loan has a 4.5% floor rate, your rate won’t drop to 3%; it will stay at 4.5%. Your rate will be higher than if the lender had no floor rate.

Rate	Bench	Margin	Floor	Final
Fixed	N/A	N/A	N/A	5%
Variable	5%	1%	N/A	6%
Variable low	2%	1%	N/A	3%
Variable floor	2%	1%	4.5%	4.5%

• Fixed-rate loan: No surprises. With a fixed interest rate of 5%, there’s no floor rate. You always know what you’re getting—in this case, a 5% interest rate.
• Variable-rate loan: Starting point. You begin with a 6% interest rate due to the 5% benchmark and 1% margin. It can go up or down depending on the benchmark.
• Variable loan with a low benchmark: Potential savings. If the benchmark drops to 2%, your rate goes down to 3%. That’s terrific news for you.
• Variable loan with a floor rate: The catch. Here’s the tricky part. Even if the benchmark plummets to 2%, a 4.5% floor rate means you won’t pay less than 4.5% in interest. That could cost you thousands more over a 10-year period.

HELOC floor rates

A home equity line of credit lets you borrow money using the equity in your home as collateral. It’s like a credit card but for your house. Most HELOCs have variable interest rates that can change based on market conditions.

Floor rates often apply to variable rates and set a “bottom limit” for what you’ll pay on your HELOC. They don’t apply to fixed-rate loans. So if you lock in part or all of your HELOC balance so it has a fixed rate, you won’t need to worry about a floor rate.

When you first open a HELOC,  lenders might offer a low introductory rate as a promotional tactic to attract borrowers. This rate is often temporary, lasting the first six months or the first year.

Sometimes, the introductory rate can be lower than the floor rate. So before you let a company reel you in with its low promotional rate, look at what the floor rate is. Because once the promotional period ends, your rate won’t drop below that floor rate, even if market conditions suggest it should. 

Example

Let’s say you decide to get a HELOC to make home improvements. The bank offers you an enticing introductory rate of 0% for six months. You’re happy to take the fantastic deal. But you also notice the HELOC has a floor rate of 4%.

After six months, market conditions change, and the variable interest rate tied to your HELOC comes out to 2.5% (based on the prime rate + your lender’s margin). You might expect your interest rate to adjust to 2.5%, but because of the floor rate, your interest rate will not drop below 4%.

This example highlights the importance of understanding floor rates. Even if market rates go below the floor, you’re still bound to that minimum. 

You might benefit from the introductory rate, but consider the implications of the floor rate for the rest of your loan term. 

Mortgage floor rates

Mortgages can have either fixed or variable interest rates. With a fixed-rate mortgage, the interest rate stays the same throughout the life of the loan, so floor rates don’t apply. However, variable-rate mortgages, such as adjustable-rate mortgages (ARMs), often include floor rates to protect the lender from excessively low rates during the adjustment periods.

Floor rates in ARMs set a minimum interest rate you’ll pay after the fixed period ends, regardless of how low the benchmark rate drops.

Example

Imagine you have a $300,000 adjustable-rate mortgage (ARM) with an initial fixed interest rate of 4% for the first five years. After the fixed period, the rate adjusts annually based on a benchmark rate like the LIBOR plus a 2% margin. At the first adjustment, the benchmark drops to 1%, so your rate should adjust to 3% (1% + 2%).

However, your loan includes a floor rate of 4%. Instead of your rate dropping to 3%, it stays at 4%, costing you an additional $3,000 in interest over a single year compared to what you would have paid with a 3% rate. Over the life of the loan, this could cost tens of thousands of dollars.

This example highlights why it’s crucial to understand how floor rates could limit your savings during periods of falling interest rates.

Reverse mortgage floor rates

Reverse mortgages allow homeowners aged 62 or older to borrow against their home’s equity, with repayment deferred until they sell the home or pass away. These loans often have variable rates, tied to a benchmark like the prime rate plus a margin. Floor rates can impact the interest that accrues, ultimately reducing how much equity remains in the home.

Example

Suppose you take out a reverse mortgage with a $200,000 credit line. The variable interest rate is based on the prime rate (7.75%) plus a 2% margin, starting at 9.75%. If the prime rate drops to 6%, your rate would normally adjust to 8% (6% + 2%).

However, if your reverse mortgage has a floor rate of 7%, your rate won’t drop below that. This could result in additional costs.

• Without the floor rate, at an 8% interest rate, the annual cost on $100,000 borrowed would be $8,000.
• With the floor rate of 7%, the annual cost on $100,000 borrowed would be $7,000.
• The difference is $1,000 per $100,000 borrowed.

Over a decade, this could cost you an additional $10,000 per $100,000 borrowed. For a $200,000 credit line, that’s $20,000 over 10 years compared to a loan without a floor rate.

Auto loan floor rates

Most auto loans come with fixed interest rates, ensuring predictable payments over the life of the loan. However, some lenders offer variable-rate auto loans, often tied to a benchmark rate like the prime rate. These loans may include a floor rate to ensure the lender receives a minimum return.

Example

You finance a $30,000 car with a variable-rate auto loan. The starting rate is 9.75%, based on the prime rate (7.75%) plus a 2% margin. Over time, the prime rate drops to 6%, so your interest rate should drop to 8% (6% + 2%).

But because your auto loan has a floor rate of 7%, your rate stays higher. This adds approximately $300 in extra interest for every year of the loan compared to the 8% rate. Over a five-year loan, this could cost you $1,500 more than if there were no floor rate.

Personal loan floor rates

Personal loans typically have fixed interest rates, making payments predictable over the loan term. However, variable-rate personal loans do exist, often tied to a benchmark like the Prime Rate. These loans may include a floor rate to ensure the interest rate doesn’t drop below a minimum level, protecting the lender’s profitability.

Example

You take out a $10,000 personal loan with a variable rate. The starting rate is 11.75%, based on the prime rate (7.75%) plus a 4% margin. After a year, the prime rate drops to 6%, so you expect your interest rate to adjust to 10% (6% + 4%).

However, the loan agreement includes a floor rate of 8%. This adds an extra $200 in annual interest to your payments compared to the 10% rate. Over a three-year term, this could cost you $600 more than a loan without a floor rate.

Current landscape of interest rate floors

In recent years, floor rates have been influenced by rising interest rates since 2020. During the early days of the pandemic, when the Federal Reserve slashed rates to near 0%, many lenders left floor rates unchanged to protect their margins.

However, as the Fed began aggressively raising rates in 2022 to combat inflation, lenders adjusted their floor rates upward to align with the higher interest rate environment.

This upward trend means borrowers may have less opportunity to benefit from falling rates in the future. For instance, a HELOC that had a floor rate of 3.25% in 2020 might now have a floor rate closer to 4%, reflecting the increased market rates.

Unlike ceiling rates, floor rates are rarely advertised. Among the lenders we reviewed, only a few disclosed floor rates publicly. Here are some floor rates from lenders that do advertise them:

Lender/product	Floor rate
Bethpage Federal Credit Union HELOC	3.25%
Navy Federal Credit Union HELOC	3.99%
Spring EQ HELOC	4.00%
U.S. Bank HELOC	3.25%

For other loan types, such as adjustable-rate mortgages or variable-rate personal loans, floor rate details are typically disclosed only during the application process or in the loan agreement.

Borrowers should always ask lenders for this information and factor it into their decision-making, as floor rates can significantly impact the savings potential of a variable-rate loan.

Compare other loan features alongside floor rates when choosing a loan. Be aware of repayment terms, and consider the adjustment rate for any variable-rate loans (because some have limits on the amount of increase in a given time). 

Ask about the floor rate of the loan as part of the underwriting process and ask about any flexibility to ensure you can get it as low as possible. Lenders are required to provide you with this information, and it will be included in your loan documents

Rand Millwood, CFP®

FAQ

What’s the opposite of a floor rate?

The opposite of a floor rate is a “ceiling rate” or “cap rate.” It’s the maximum interest rate you could be charged on a variable loan. A floor rate sets the lowest your interest can go, and a ceiling rate sets the highest it can reach. 

This protects you during times of high interest rates by ensuring your rate won’t skyrocket beyond a certain level. The ceiling rate for many variable rate home equity loans is 18%, but it can be as high as 24% or more. 

Does everyone get the same floor rate, or does credit score play a part?

Everyone gets the same floor rate. The lender sets it based on market conditions. The floor rate might be consistent, but the interest rate you qualify for will vary based on factors including your credit score and the amount of equity you have in your home.

How does the prime rate factor in?

The Wall Street Journal Prime Rate is often the benchmark for setting interest rates on HELOCs and other variable-rate loans. The rate is often the prime rate plus a margin. So if the prime rate is 5% and the margin is 1%, your annual percentage rate (APR) would be 6%.

Even if the prime rate plummets, the floor rate will prevent your interest rate from going below a certain level. And if the prime rate rises, it might be capped by a ceiling rate.

Can a floor rate change over time, or is it static?

Once your home equity loan or HELOC is active, the floor rate usually can’t change. It serves as a consistent minimum interest rate you can expect, regardless of market fluctuations. Always review your loan agreement to be certain of its terms, including whether it has a floor rate.

How can you tell if a floor rate is competitive when shopping for a loan?

To determine if a floor rate is competitive, compare rates across lenders for the same loan type. Look for lower floor rates, especially if market rates are high and expected to drop.

Check the margin (benchmark + margin) and ensure the floor rate aligns with competitive terms. Also, consider whether the lender allows negotiation and weigh the floor rate against other loan features, like fees and repayment terms.