Video Transcript:
What's up everyone, this is Daniel Sperling-Horowitz with OfferMarket and today I want to talk about our DSCR interest rate predictions...
Actually I would like to clarify that anyone who thinks that they can predict interest rates is probably in for a rude awakening. So what we're advising our clients -- rental property investors and also on the fix and flip flipping side of our private lending business, but specifically to focus on DSCR loans for a moment -- what we're advising is to seriously consider lower prepayment penalty options.
DSCR Loan Interest Rate Market Update
So before we get into prepayment penalties, I just want to provide a quick update on DSCR loan interest rates. So our benchmark that we look to see or assess the health of the DSCR market is the 30 year fixed rate conventional mortgage which I believe as of this morning and certainly as of yesterday was at 6.65% down from a peak of somewhere around 7.3%. So what we saw over the last few weeks was a convergence between that 30 year fixed rate conventional mortgage and the DSCR interest rate. So we were quoting right around the same thing for prime borrowers on the DSCR side. Last week were were quoting 7.2% and sometimes even lower than 7.2% when the 30 year fixed rate was at 7.2%. Since the latest inflation reports have come out over the last week, the 30 year fixed rate (conventional mortgage) and then the underlying treasury yields like the 10 year treasury for example, they've come down pretty significantly which has led to the 30 year fixed rate (conventional mortgage) coming down to that 6.65% number. And so, unfortunately, and a lot of borrowers are calling asking "hey, are interest rates lower now" on the DSCR side what we're seeing is actually interest rates have remained flat or stable and in some cases actually gone up slightly. And that, if you read into it, based on the DSCR market, the market participants, these consumers of fixed income, these large insurance companies, pension funds, credit funds, they want to be compensated for perceived risk right now in the market. Real estate investors, people who don't have these properties as their primary residence are a little bit riskier, these are no doc loans, we're not looking at W2s (salaried employment), we're not looking at tax returns, so that spread between the 30 year fixed rate conventional mortgage and the 30 year DSCR loan has actually widened again -- in many cases it's upwards of you know 0.75% to 1.5% premium. So we have that published on our DSCR Loan Interest Rate Index so I'll include a link to that in the description here.
What is a Prepayment Penalty?
But now let's get into PPP prepayment penalty. The standard prepayment penalty for DSCR loans from our perspective across all of the capital providers that are on our platform, is a 3-2-1. What that means is -- it's otherwise known as a step-down from 3% to 2% to 1% of the outstanding loan amount at the time of payoff. So, if it's a 3-2-1 and you decide within year 1 that you want to payoff the loan, either you sell the property or you refi, you're paying 3% of outstanding loan balance at that time. So if the outstanding loan balance is $100,000, that's a $3,000 penalty.
5-4-3-2-1 Prepayment Penalty
Now, if you have a higher prepayment penalty like a 5-4-3-2-1 where 5% is the fee or penalty in year 1, you're going to get a slightly lower interest rate. But is it worth it? Right, again, going back to the start of this video, it's really a fools errand to try to predict interest rates, but what we can say is that these interest rates do seem a bit elevated and unsustainable, maybe that's an understatement, certainly the housing market is experiencing extreme pressure because of these elevated rates.
Prepayment Penalty and Refi Strategy
So it's within reason to expect that there might be opportunities to refinance 2, 3 years down the road and so you have options on the prepayment penalty side and that's what we're advising our clients. Instead of that 5-4-3-2-1 prepayment penalty, look at a 3-2-1 pre-payment penalty. The difference in monthly payment is not that significant and you have a much lower penalty if in year 2 or year 3 you're looking to payoff the loan through a refi or sell off the property.
No Prepayment Penalty
There's even more flexibility on the pre-payment penalty side. We have options where you can do let's say 1% in year 1 and then no prepayment penalty in year 2. So the worst you're getting hit with is let's say a 1% fee which is very manageable, right, and in exchange you're paying a higher interest rate which the difference between lets say 8% quote on a 3-2-1 and an 8.5% quote on a 1-0-0, it might be worth it, you can almost look at it as, at that point, like a bridge loan to get you to a point where you can refinance. So we're here to help you evaluate your options and provide you with the most competitive DSCR loan quotes.
OfferMarket Youtube Channel
I hope this video was helpful and informative. Please like the video, subscribe to our channel, reach out to us, you can get a quote directly at OfferMarket.us, click the 'Loans' button or go straight to OfferMarket.us/loans. Thanks so much for tuning in today and have a great day!
