Interest rate 6.068% too high?

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Interest rate 6.068% too high?

Dolly La Salle
Germany and Jacksonville, FL · Member since 2018 · 108 posts · 18 votes

Hello. I plan to buy my first rental and received a pre-approval from a mortgage broker for a loan of 6.068%. I understand that the interest rate is higher when you buy an investment property, but I have really good credit so not sure why the interest rate is so high. This is affecting me from getting good cash flow deals. Every deal that I analyze gives me a negative cash flow and it's due to the high P&I and low monthly gross rent. Does anybody have any suggestions? Thank you.

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Stephanie P.Pro Member
Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
7y
Originally posted by @Dolly La Salle:

@Chayson D., thank you for the info. Per my loan worksheet,  the Interest Rate is 5.75% and the Annual Percentage Rate is 6.068. Yes, I got approved for a $150 loan. If I ask for a higher loan, then I will need a higher down payment. If I pay for points or have a high interest rate, that's still money coming out of my pocket. The Lender is also charging me a 5.3% of the loan amount for the Closing Cost. Does 5.3% seem normal or high?

 Dolly

5.75 is a pretty good rate for a non-owner occupied property at that loan size.  

APR and interest rate are two different things. APR has other costs involved and interest rate is just that.

Asking if 5.3% closing costs is too high is also a hard one to answer.  Are you including escrows in there? Is it an estimate or do you know what the title company is going to charge?  Are prepaids in there as well.  Too many variables to tell.  If you're asking if if 5K on a 100K loan is high, I would say no if escrows, prepaids and title charges are in there.

Stephanie

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  • Scarola Markson
    Property Manager · Brielle, NJ · Member since 2017 · 28 posts · 8 votes
    8y
    @Dolly La Salle Where are you based? We have funding partners that offer lower rates based on good Score and positive cash flow.
    0Reply
  • Dolly La Salle
    OP
    Germany and Jacksonville, FL · Member since 2018 · 108 posts · 18 votes
    8y

    @Scarola Markson, thank you for your prompt response. I am based in Jacksonville, FL. 

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    8y

    @Dolly La Salle I'm not sure why your rate would be so high but I do know this: investors were finding deals when the mortgage rates were 9% and 4%. You may have to work a little harder and be more selective but you can still find good, cash-flowing properties with a 6% loan.

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    2Reply
  • Dolly La Salle
    OP
    Germany and Jacksonville, FL · Member since 2018 · 108 posts · 18 votes
    7y

    @Nathan G., thsnk you for your response. Then, perhaps the cause could also be the average rent that I could charge the tenant? So, the properties that I am looking at are low $100k that are still in a descent neighborhood and need a little rehab. Even with all of these factors, the average rent that I could charge is about $1200 max. I feel that the combination of my annual interest rate and a low maximum rent, it's making it difficult to find a good deal. Do you think the monthly gross rent is affecting it?

    0Reply
  • Chayson Descisciolo
    Lender · Orange County, CA · Member since 2018 · 30 posts · 9 votes
    7y

    @Dolly La Salle A rate of 6.068% sounds a little odd. Are you sure you're not looking at the APR instead? If that is your true rate it does sound a little high, although keep in mind rates have been doing nothing but going up for the past 10 months. Also, the 10 year treasury note which can be seen as an indicator for rates hit it's highest level in years yesterday. You've also got a small loan amount which is a negative for most banks. On the plus side, since your loan amount is small you can afford to pay a couple points and drive the rate back down a bit.

    2Reply
  • Dolly La Salle
    OP
    Germany and Jacksonville, FL · Member since 2018 · 108 posts · 18 votes
    7y

    @Chayson D., thank you for the info. Per my loan worksheet,  the Interest Rate is 5.75% and the Annual Percentage Rate is 6.068. Yes, I got approved for a $150 loan. If I ask for a higher loan, then I will need a higher down payment. If I pay for points or have a high interest rate, that's still money coming out of my pocket. The Lender is also charging me a 5.3% of the loan amount for the Closing Cost. Does 5.3% seem normal or high?

    0Reply
  • Scarola Markson
    Property Manager · Brielle, NJ · Member since 2017 · 28 posts · 8 votes
    7y
    @Dolly La Salle 5.3% to close seems a too high to me. This isn’t a HML so it shouldn’t cost above 2-3points
    0Reply
  • Roberto Costa
    Rental Property Investor · Norfolk, VA · Member since 2016 · 90 posts · 26 votes
    7y

    @Scarola Markson Are you a broker?  I just got quoted 6.125% on a $145K purchase with 20% down and I though it was pretty high.  Any suggestions?

    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    7y

    All rates for all scenarios are "too high" right now.

    We're departing the "era of historically low rates" and trending towards historic norms. A historically normal interest rate for a SFR owner occ with 20% down is 6.5% to 7%, bump that 1% or so for investors. We haven't hit that yet, but that's the direction we're headed.

    FWIW, most economists think it's "good" that rates are going up. Sucks for real estate investors and lenders, though. 

    3Reply
  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    7y
    Originally posted by @Dolly La Salle:

    @Chayson D., thank you for the info. Per my loan worksheet,  the Interest Rate is 5.75% and the Annual Percentage Rate is 6.068. Yes, I got approved for a $150 loan. If I ask for a higher loan, then I will need a higher down payment. If I pay for points or have a high interest rate, that's still money coming out of my pocket. The Lender is also charging me a 5.3% of the loan amount for the Closing Cost. Does 5.3% seem normal or high?

     Dolly

    5.75 is a pretty good rate for a non-owner occupied property at that loan size.  

    APR and interest rate are two different things. APR has other costs involved and interest rate is just that.

    Asking if 5.3% closing costs is too high is also a hard one to answer.  Are you including escrows in there? Is it an estimate or do you know what the title company is going to charge?  Are prepaids in there as well.  Too many variables to tell.  If you're asking if if 5K on a 100K loan is high, I would say no if escrows, prepaids and title charges are in there.

    Stephanie

    4Reply
  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    7y

    that seems high ...what is loan fee tied to this 5.75 note rate ? …...closing costs as a percentage is not the best way to look at comparison shopping …. what is the loan amount / purchase price ? do you have any other financed properties other than your home ? is property SFR or condo ?

    fyi - if this is still a pre approval - these rates / prices are all subject to  change

    0Reply
  • Chayson Descisciolo
    Lender · Orange County, CA · Member since 2018 · 30 posts · 9 votes
    7y

    @Dolly La Salle 5.75% for an investment property isn't bad. As others have mentioned rates are going up and the world of 30 year fixed investment property loans in the 4% range are quickly becoming a thing of the past.

    In terms of 5.3% of the loan amount for costs, that does sound high if you're just talking about the origination fee. If you're talking all closing costs & prepaids that may not be too bad. Title/escrow fees on a purchase are much higher than a refi and on smaller loans there's probably some points in there. 

    If you'd like I can take a look at your loan worksheet/loan estimate and let you know what if I see anything odd. 

    Also, it sounds like you're just in the beginning stages of your purchase. With that being the case your rate is most likely not locked and based on current trends you should expect the costs and rate to be higher by the time you're ready to go

    0Reply
  • Chayson Descisciolo
    Lender · Orange County, CA · Member since 2018 · 30 posts · 9 votes
    7y

    @Roberto Costa 6.125% may not be all that abnormal depending on your credit scores and the costs of the loan. If you feel it's high I'd suggest shopping around a bit. If you want a competitive rate I'd stay away from the big banks (wells, chase, etc) and major online lenders like quicken loans, loandepot, etc. They have gigantic margins and terrible rates.

    1Reply
  • Scarola Markson
    Property Manager · Brielle, NJ · Member since 2017 · 28 posts · 8 votes
    7y
    @Roberto Costa 6.125% seems a bit normal depending on other factors and how the lender arrives at that rate. your credit scores, NOI and the costs of the loan. Just like chayson suggested, If you want a competitive rate you would stay away from the big banks and major online lenders like quicken loans, loandepot, etc. if you have good credit history some lenders will go as low as 4.25-5.75% but higher points in most cases
    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    7y

    Rates are up again, 3rd day in a row.

    0Reply
  • Andrew Baker
    Commercial Real Estate Financing Advisor · Walnut Creek, CA · Member since 2018 · 55 posts · 18 votes
    7y

    I'm not sure why everyone thinks 5.75 is high? I would lock it down before it climbs higher.

    1Reply
  • Dolly La Salle
    OP
    Germany and Jacksonville, FL · Member since 2018 · 108 posts · 18 votes
    7y

    Thank you all for your feedback. So, when I analyze deals using the BP Calculator, am I suppose to use the Annual Interest Rate of 6.068% or the Interest Rate of 5.75% that is stated in my pre-approval worksheet?

    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    7y
    Originally posted by @Dolly La Salle:

    Thank you all for your feedback. So, when I analyze deals using the BP Calculator, am I suppose to use the Annual Interest Rate of 6.068% or the Interest Rate of 5.75% that is stated in my pre-approval worksheet?

     5.75%, BUT since you're still evaluating things and whatnot, rates are still climbing while you're on the fence, so assume 6.25% to be conservative. 

    0Reply
  • Julie Phan
    La Puente, CA · Member since 2017 · 5 posts · 3 votes
    7y

    Hi @Dolly La Salle - I just closed a loan at 4.875% with some points paid about $1800 to lower it to that rate just 2 weeks ago. 30 year fixed with 25% down, investment property, conventional loan. I went with Shawn Huss @ Chemical Bank. His team is awesome! Rates did go up a little, but I don't think in the 6%. Maybe you are using a commercial lender?

    0Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    7y

    You can buy interest down. Right now the optimum requires 25% down. 1.25% points at 4.65% 30 year fixed. Oops, in very distant future it will bump up at least 20-25 points very quickly.....


    0Reply
  • Dolly La Salle
    OP
    Germany and Jacksonville, FL · Member since 2018 · 108 posts · 18 votes
    7y

    @Chris Mason, thank you for the information. It just sucks that now when I decided to get into REI, is when the interest rates are getting too high. I guess it's a reality that investors are going to have to accept.

    1Reply
  • Dolly La Salle
    OP
    Germany and Jacksonville, FL · Member since 2018 · 108 posts · 18 votes
    7y

    @Stephanie Potter, thank you for the information. I've been analyzing all deals using the APR 6.068 so I've been doing it wrong. However, from what most people in this forum have been saying, 6% or above is starting to look like what I will be getting in the end.

    As for the estimated closing cost, my pre approval worksheet states:

    Processing Fees, Underwriting Fees, Your Credit or Points, Appraisal, Credit Report, AMC Fee, Lender's Title Insurance, Notary Fees, Title Search Abstract, Recording Fees, Transfer Taxes, and State Tax/Stamps.

    I do not see anywhere in the worksheet that it states Escrow.

    0Reply
  • Dolly La Salle
    OP
    Germany and Jacksonville, FL · Member since 2018 · 108 posts · 18 votes
    7y

    @Dave Skow, thank you for response. The loan amount was for $115,200 and the purchase price was for $144,000. I do not have any other financed properties. This estimate was for a SFR. So, what do you suggest on determining the closing cost? I prefer the worst case scenario so that way I can be financially prepared.

    0Reply
  • Dolly La Salle
    OP
    Germany and Jacksonville, FL · Member since 2018 · 108 posts · 18 votes
    7y

    @Chayson Descisciolo, thank you for offering to look at my loan worksheet. I appreciate any feedback to see if the fees and amounts look odd. How can I send it to you? Yes, I am in the beginning stages of the purchase. However, in the end, I declined to not pursue this investment because the estimate did not look right to me. So, I would love to learn what to expect for the next estimate.

    0Reply
  • Dolly La Salle
    OP
    Germany and Jacksonville, FL · Member since 2018 · 108 posts · 18 votes
    7y

    @Andrew Baker, I wish I can lock it, but I haven't found a great deal, yet. So, I have to wait and just hope the interest rates does not rise too much.

    0Reply
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