In the context of commercial mortgages, the Nearest 1/8th (often written as 1/8% or 0.125%) refers to a specific rounding convention used to determine the final interest rate on a loan. This provision is most commonly found in floating-rate or adjustable-rate mortgages (ARMs). It dictates that once the lender adds the agreed-upon margin to the underlying index (such as SOFR or Prime), the resulting figure must be rounded to the nearest increment of 0.125%.
Commercial loan documents specify exactly how the interest rate is calculated to avoid ambiguity between the borrower and the lender. The Nearest 1/8th rule serves as a mathematical standard to simplify payment schedules and align with historical banking practices where rates were expressed in fractions.
The increments of an 1/8th include:
When a rate adjustment occurs, the lender takes the current Index Value and adds the Margin. If the sum is not exactly one of the increments listed above, it is rounded to the closest one. For example, if the calculated raw rate is 5.11%, the rate would be rounded up to 5.125% because 5.11 is closer to 5.125 than it is to 5.000.
While a difference of a few basis points may seem negligible, in large-scale commercial real estate transactions, these rounding differences can impact the Debt Service Coverage Ratio (DSCR) and the total interest paid over the life of the loan. Borrowers should carefully review the Interest Rate Adjustment section of their promissory note to determine if the rounding is to the nearest 1/8th, or if the contract specifies rounding up to the next 1/8th, which would be more favorable to the lender.
Standardizing the rate to the Nearest 1/8th also assists in the secondary mortgage market, as it makes commercial mortgage-backed securities (CMBS) easier to price and trade when the underlying loans follow consistent rounding protocols.
| Nearest 118th | |
|---|---|
| Definition | An interest rate rounding method in which the final note rate is rounded up or down to the nearest 0.125%. |
| Type of Word | Noun |
| Click To Hear Pronunciation | |
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