DSCR Loan Interest Rate Prediction and Prepayment Penalty Options

Video Transcript:

What’s up everyone, this is Daniel Sperling-Horowitz with OfferMarket, and today I want to talk about our DSCR Loan Interest Rate Prediction.

Actually, I’d like to clarify that anyone who thinks they can predict interest rates is probably in for a rude awakening. So, what we’re advising our clients—rental property investors and those on the fix-and-flip side of our private lending business—is to seriously consider lower prepayment penalty options. Specifically, when focusing on DSCR loans, the DSCR Loan Interest Rate Prediction can be challenging, but understanding prepayment penalties and structuring loans accordingly can help investors make more informed decisions.

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 Rate Predictions. Our benchmark for assessing the health of the DSCR market is the 30-year fixed-rate conventional mortgage, which, as of this morning—and certainly as of yesterday—was at 6.65%, down from a peak of around 7.3%. Over the last few weeks, we saw a convergence between the 30-year fixed-rate conventional mortgage and the DSCR Loan Interest Rate. For prime borrowers, we were quoting nearly the same rate on the DSCR loan side. Last week, we were quoting 7.2%, and sometimes even lower than 7.2% when the 30-year fixed rate was at 7.2%.

However, since the latest inflation reports have come out, the 30-year fixed rate (conventional mortgage) and underlying treasury yields, such as the 10-year treasury, have come down significantly. This has led to the 30-year fixed rate (conventional mortgage) dropping to that 6.65% number. Unfortunately, despite this drop, many borrowers are asking, “Hey, are DSCR loan interest rates lower now?” What we’re seeing is that DSCR loan interest rates have remained flat or stable, and in some cases, they’ve actually increased slightly.

If you read into it based on the DSCR Loan Interest Rate Index, the market participants—such as large insurance companies, pension funds, and credit funds—want to be compensated for perceived risk in the market. Real estate investors, especially those who don’t have these properties as their primary residence, are seen as a little riskier. These are no-doc loans; we’re not looking at W2s, tax returns, or other typical documentation, 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 0.75% to 1.5% premium.

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 on our platform, is a 3-2-1 structure. 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 prepayment penalty and you decide within year 1 that you want to pay off the loan—whether you sell the property or refinance—you’re paying 3% of the outstanding loan balance at that time. For example, 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 likely going to get a slightly lower DSCR loan interest rate. But is it worth it? Again, going back to the start of this video, it’s really a fool's errand to try to predict interest rates, but what we can say is that these rates do seem a bit elevated and potentially unsustainable. That might be an understatement. Certainly, the housing market is experiencing extreme pressure due to these elevated rates, which is something to consider when evaluating your prepayment penalty options in DSCR loans.

Prepayment Penalty and DSCR 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, and reach out to us for more information. You can get a DSCR loan quote directly at OfferMarket.us—just click the ‘Loans’ button or go straight to OfferMarket.us/loans. Thanks so much for tuning in today, and have a great day!