What is With These Rates?
April 20, 2022
As you’ve undoubtedly seen, heard, or experienced over the last few weeks, interest rates across all markets have taken a dramatic turn upwards.
Captured April 20th, 2022 via cnbc.com
Captured April 20th, 2022 via freddiemac.com
Why is this happening?
With the pandemic’s declining economic impact, inflation running at 40-year highs, and the Federal Reserve outlining an aggressive policy plan, interest rates could continue trending upward. The answer likely lies in some combination of these topics, and unfortunately there’s nothing those of us at Renovo Financial can do to change any of it. So we’re going to stay away from trying to figure out why it’s happening and instead explain how the recent changes are impacting our products, pricing, and procedures.
How Our Long Term Loans are Priced
How do we get to the ultimate coupon rate that our client pays? The formula goes like this:
What is the Index?
Our long term product (rental loans) are based off of an index. That index is the 5 Year Treasury Bond.
– Throughout 2021 that index floated between .50% and 1.2%
– On Jan 1 that index was 1.3%
– On March 1 that index was 1.5%
– By March 30 it was 2.54 and on Monday it was 2.78%
This rate changes daily, and will be emphasized again in our equation.
What is the Margin?
This is the spread between the index rate and your ultimate coupon rate. Margin is impacted by a number of factors, namely:
– Credit Score
– Loan to Value
– Debt Coverage
– Loan size
– Pre-Payment Penalty
– Property Type
– Loan Duration (5/7/10 Year ARM, 30 Year Fixed, etc)
Think of the margin like a measurement of risk of the loan. A $1mm+ loan, with a borrower who has an 800 credit score, with a 60% LTV, and a 1.35 debt coverage is a less risky loan and a would have a lower margin than say a $150k loan with a borrower having a 690 credit score with a 75% LTV and a 1.21 debt coverage. Seems reasonable, right?
Computed by a variety of factors, different for each loan
The rate you pay
How Will The Process Work Now?
When you have a potential term loan you would like finance with Renovo, you will send us all of the information we need (property value, rental amounts, tax, insurance, etc.). We will then receive your credit score and plug all the information into our pricing tool.
What we will give you is an LOI which shows that day’s INDEX (5 yr rate) + the MARGIN (spread) that your loan and credit profile creates.
Once you sign your LOI, you have 45 days to close the loan. Your MARGIN is locked up until approval, at which point your COUPON will become fixed.
We start the process of underwriting, appraisal, etc. and take your loan in for approval. During that time, the INDEX (5 yr rate) is floating, it can go up, it can also go down (allowing a total of a .25% potential decrease).
We continue to be committed to providing you with the products necessary to grow your businesses and achieve your goals. Check out our locations to find your nearest team. Our lenders live and work in top markets around the country, so they truly know the area you’re investing in. We’re expanding our reach quickly, so if you don’t see your market listed, we’ll likely be there soon!
Ready to get started? Want to learn more about how we can help you grow your investment business? Call us at (888) 568-8894, email us at firstname.lastname@example.org or fill out the form below and a representative will be in touch within 1-5 business days.
222 W. Adams St, Chicago, IL 60606