Is this rate too high?

Question

Hello,.

We are looking to purchase an investment property and are looking to close at the beginning of March. We both have an A+ credit rating (confirmed by the lender).

We are only putting down 20% and I think the rate he gave us was too high especially for our credit rating. He gave us a rate of 7.5 with an APR of 7.765%

I know if we put down 25% we can get a rate of 6.5% but we would reallt prefer to put 20% down and save the extra to do some upgrades in the unit before we rent it with the plan of refinancing in a year or so when rates are hopefully lower.

Even though we are only putting 20% down, we feel the rate is still on the high side for people with our credit rating (I'm over 800 my wife is around 785).

Is this rate too high? Or does it seem about right?

Thank you!

Stacy Raskin · Answer

There are options in the 6s as of the date of this posting. Also, it depends on if the loan is a conventional loan or if a DSCR loan. A conventional loan is a loan structured based on your debt to income (DTI) ratios. If a DSCR loan it won't use your income to underwrite the loan.

More info on DSCR loans- they are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth. There are generally shorter seasoning periods or waiting periods for DSCR loans versus conventional when an investor is looking to do a cash out refinance.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals. Happy to connect to discuss further.

Bo Smith · Answer

7.5% seems high for 800+ credit. Shop credit unions - they often beat big banks on investor properties by 0.5-1%. Also check if your lender is adding investor premiums on top of base rates. Have you tried any credit unions yet?

Patricia Steiner · Answer

As an investor and real estate broker/owner of a private client investment firm, the interest rate is not as important as long as there is no prepayment penalty and the points and fees are low.  The interest expense can be recouped through your rental price in the right market - but out-of-pocket expenses like fees and points are just wealth eaters.  Without a prepayment penalty, you can refinance when we (finally) get back to a more reduced rate environment than what we're in now.  Bottom line:  get a few quotes...looks like you have some good lender resources here but spend time understanding the out-of-pocket expenses. The less down payment the better.  Success in Real Estate Investing is based on many factors but leverage is a major driver.  Congrats on your soon-to-be acquisition.

Patrick Roberts · Answer

There is so much more than just what's been listed that drive the LLPAs that ultimately determine your rate at a given pricing.

For instance, here are just some of the other variables that affect the quote: the type of loan, the term, the structure, the zip code, the property type, the number of units, the PPP, the points, the day when the rate was quoted, the LTV, the loan size, DSC ratio, the list goes on.

Youre not going to get good feedback on a social media forum with this kind of question. What youre going to get is a bunch of lenders and brokers saying "I can do XXX better - message me". If you dont trust your current lender, go get a competing quote from someone you feel you can trust and then make an apples to apples comparion.

Keep in mind that there is more to a loan than just a rate quote. Rate is ultimately a function of pricing, which is a function of what the lender is charging. Almost everyone in the securitized loan market is selling their loans to same pools and gets the same raw pricing.

Some lenders charge more than others because theyre greedy or have bloated infrastructure, while some charge more than others because they are good at what they do. For instance, a lot of cut-rate lending shops will offer super low rates but then blow your loan up or hit you with new terms a week before closing because they botched the underwriting and it's now getting straightened out. The reason they are cheap is that they dont pay for the infrastructure (skilled people, tech, etc) that is needed to competently close your loan, which in turn leads to underperformance. Alternatively, some places charge more just because they want fat margins and will cut their margin to improve the deal as soon as you shop them.

At the end of the day, you can have any rate you want if youre willing to pay for it with pricing. My recommendation would be to focus first on working with a competent, trustworthy lender, and then figure out where the sweet spot is between rate and pricing. Shopping lenders just by rate is the equivalent of shopping contractors just on job estimates. Going with super cheap stuff tends to bite you in the end.

Benjamin Aaker · Answer

You haven't given us all the information on the proposed loan. The other terms have an impact on the rate offered. At face value 7.765 seems high, but your prior investment experience, the amortization, and the loan term all play a role. Your best bet is to shop around to multiple other banks and see if the offers are similar.

Janice Carter · Answer

Patrick, with A+ credit, 7.5% on a 20%-down investment loan does feel on the high side, even allowing for today’s pricing.  My advice is to shop at least 3 lenders including a mortgage broker (not just banks). Brokers can price across multiple investors and often find better terms for 20% down scenarios. Also ask each lender to break out rate vs. points and fees because quite often the headline rate doesn’t tell the full story.

Nicola Mislinski · Answer

Send me a private message and I can send over a better quote

Erik Estrada · Answer

Is there a prepayment penalty on this loan? You should be able to get in the low to mid 6s with a 5-3 Year PPP on a DSCR loan at 80 LTV. Assuming the DSCR is over 1.

Is this rate too high?

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