1. Home
  2. Definitions
  3. Definition of Nearest 118th

Nearest 118th

Definition of Nearest 1/8th

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%.

Detailed Description and Mechanics

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:

  • 1/8 = 0.125%
  • 2/8 (1/4) = 0.250%
  • 3/8 = 0.375%
  • 4/8 (1/2) = 0.500%
  • 5/8 = 0.625%
  • 6/8 (3/4) = 0.750%
  • 7/8 = 0.875%
  • 8/8 (1) = 1.000%

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.

Importance in Commercial Lending

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

Commercial Loan Finder

Fill this form out to find the best commercial loan programs for your needs.

Get A Free Quote

Get a free commercial loan quote. This process does not affect your credit score.

Please put your first name here.
Please put your last name here.
Please put your email here.
Please put your phone number here.
Please select a property type.

Real Deals. Real Results.

Success Stories

See how we've helped borrowers across the country close complex deals and reach their goals.

Ace Hardware Franchise Grand Opening - Herb and Gwen Velazquez SBA 7(a)

New Ace Hardware Franchise Financing

Alpharetta, GA Retail Franchise Real Estate + Working Capital

CLD was most helpful from answering my initial questions to the follow up... We would not have been able to start this business without CLD.

— Herb & Gwen Velazquez Read Story
Golden Valley Luxury Apartments - 332 Units, Bakersfield CA CMBS

Apartment Refinance — 332 Units

Bakersfield, CA Luxury Multifamily Non-Recourse · 10-Yr I/O

I had a tremendously good experience with CLD and especially with my loan specialist — she identified the ideal loan program and handled everything professionally.

— Golden Valley Apartments Read Story
University Place Apartments - Student Housing, Columbia MO Conventional

Student Housing Refinancing — 181 Units

Columbia, MO Mixed-Use Student Housing Non-Recourse · 10-Yr

I felt confident through the process that things were under control, that my interests were protected — always a pleasure to work with.

— Mark Leifield Read Story

Want to see what real clients say about working with us?

Read Our Unfiltered Reviews

Was this page helpful?