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Rajeev Samuel
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Interest only DSCR Loan for multifamily vs commercial balloon

Rajeev Samuel
Pro Member
  • New to Real Estate
  • Northwest Arkansas
Posted Oct 20 2022, 15:23

Hi all, 

I'm looking to do my first investment property soon and while I was looking for a SFH or small multifamily, an off market 5-plex was presented to me that could be a good deal if I can figure out financing.

Cost is tentatively 300K with current rent being $3000 a month, with potential to bring up to $3500-3750 a month.  So decent cashflow even as it stands now. The two options I have identified are a more typical commercial loan at 15%-20% down, around 7.3% interest with a 5 year balloon.  To be honest, the 5 year balloon kinda freaks me out as I believe there is a good chance interest rates continue to rise during that time. 

The other interesting option I am considering is an interest only DSCR loan. The interest rate is actually lower with this loan at 6.5%, and with the interest only option, cash flow would be larger of course with the option for me to make lump sum payments towards the principal if I choose. These are the terms of the DSCR loan I am considering.

  • 5, 7, or 10-year ARM program (30 year loan, interest only)
  • 80% loan-to-value maximum on purchase
  • 80% loan-to-value maximum on rate and term refinance
  • 80% loan-to-value maximum on cash out refinance
  • Rates starting at 5.5% at lowest LTV max LTV is 6.5%

I was contemplating the 7 or 10 yr ARMs and hopefully I would be able to sell or refinance in that timeframe.    What are your thoughts and/or advice. Again, total newbie here and this would be my first property.  

Thanks in advance!!

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Erik Estrada
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Erik Estrada
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Replied Oct 20 2022, 15:40

Hey Rajeev 

How long ago were you quoted at 6.5% for a DSCR loan? How many points is the lender charging you for that rate?

Conventional rates are floating in that range...at par pricing. 

And, is this rate locked or floating? 

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Rajeev Samuel
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Rajeev Samuel
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  • Northwest Arkansas
Replied Oct 20 2022, 15:48
Quote from @Erik Estrada:

Hey Rajeev 

How long ago were you quoted at 6.5% for a DSCR loan? How many points is the lender charging you for that rate?

Conventional rates are floating in that range...at par pricing. 

And, is this rate locked or floating? 

Hi Erik, that rate was quoted to me yesterday.  2.5-3.5 points, but let’s just assume 3.5 points.  And I believe the rate is fixed for the length of the ARM period, either 5/7/10 years with 30 year amortization to follow.  I guess my question with commercial loans is are there ones that don’t require balloon payments after the initial period?
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Erik Estrada
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Erik Estrada
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Replied Oct 20 2022, 15:53
Quote from @Rajeev Samuel:
Quote from @Erik Estrada:

Hey Rajeev 

How long ago were you quoted at 6.5% for a DSCR loan? How many points is the lender charging you for that rate?

Conventional rates are floating in that range...at par pricing. 

And, is this rate locked or floating? 

Hi Erik, that rate was quoted to me yesterday.  2.5-3.5 points, but let’s just assume 3.5 points.  And I believe the rate is fixed for the length of the ARM period, either 5/7/10 years with 30 year amortization to follow.  I guess my question with commercial loans is are there ones that don’t require balloon payments after the initial period?

There is a 5/1 ARM, fixed interest only for 5 years and then amortizes for 25 years into principal and interest payments.

How much are they charging you in origination on top of the points? 

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Rajeev Samuel
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Rajeev Samuel
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Replied Oct 20 2022, 16:10
Quote from @Erik Estrada:
Quote from @Rajeev Samuel:
Quote from @Erik Estrada:

Hey Rajeev 

How long ago were you quoted at 6.5% for a DSCR loan? How many points is the lender charging you for that rate?

Conventional rates are floating in that range...at par pricing. 

And, is this rate locked or floating? 

Hi Erik, that rate was quoted to me yesterday.  2.5-3.5 points, but let’s just assume 3.5 points.  And I believe the rate is fixed for the length of the ARM period, either 5/7/10 years with 30 year amortization to follow.  I guess my question with commercial loans is are there ones that don’t require balloon payments after the initial period?

There is a 5/1 ARM, fixed interest only for 5 years and then amortizes for 25 years into principal and interest payments.

How much are they charging you in origination on top of the points? 

No other origination fees on top of points.
Account Closed
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Account Closed
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Replied Oct 20 2022, 17:03

@Rajeev Samuel regarding the arm: one thing you should negotiate is the reset cap which is the maximum amount your interest rate can increase at the end of the initial term. Loan documents might say the reset rate caps a 3.5% higher that the current rate. This is a really big number so you can ask the lender to reduce it to 1.5% or so. This would make the reset a little less scary.

Don’t take out an interest only loan.

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Rajeev Samuel
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Rajeev Samuel
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Replied Oct 20 2022, 20:03
Quote from @Account Closed:

@Rajeev Samuel regarding the arm: one thing you should negotiate is the reset cap which is the maximum amount your interest rate can increase at the end of the initial term. Loan documents might say the reset rate caps a 3.5% higher that the current rate. This is a really big number so you can ask the lender to reduce it to 1.5% or so. This would make the reset a little less scary.

Don’t take out an interest only loan.

That is great idea in regards to the rate cap. Appreciate your advice!

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Nick Belsky
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Nick Belsky
  • Residential and Commercial Broker
Replied Oct 23 2022, 04:45

@Rajeev Samuel

3.5 points is a bit steep. Yes, there are 30yr fixed rate mortgage options for 5+ unit as well. No balloons, I/O, or funny business. 20-25% down is typical on the FRM. Keep in mind, many wholesale lenders can finance 5-8 unit multifamily under non-commercial loans. The rates will typically be a little higher than their 1-4 unit programs, but they can and will do them on 30yr fixed terms.

There are also commercial options out there that do not have balloons.  This past week I was quoted and submitted a loan with 10yr Terms.  Fixed Rate at 6.45%, amortized over 30 years.  No balloon and with 2pts, including my broker fee.  At the end of the 10yr term, the borrower can refi or extend into another 5yrs if they choose.

Keep shopping around.  Reasonable terms are still out there will all the added costs to buy down rates.

Cheers!