Factors that Can Affect a Real Estate Investor’s Interest Rate
By Kerry Curry, Contributing Writer
Several things can affect what interest rate a residential real estate investor may pay when financing his or her rental portfolio. While some factors are specific to the portfolio itself, others may be external.
For those lenders, like B2R Finance, that sell their loans in the secondary market, an investor’s interest rate can be impacted by a number of market factors including:
- Interest rate risk. This is heavily dependent on Federal Reserve monetary policy. The Federal Reserve, which raised rates for the first time in December after several years of near zero rates, has said it plans to continue to raise rates as the economy improves. For real estate investors, this means borrowing will likely become more expensive. Investors who want to know how their interest rate could be affected would be wise to stay attuned to Federal Reserve monetary policy, which can affect a borrower in both positive and negative ways.
- A yield spread over the price of U.S. Treasurys. Treasurys are the benchmark for most lending rates in the United States. For example, a lender may charge a rate of 350 basis points over the five-year U.S. Treasury (or interest rate swaps). If the Treasury was 1.5%, then the lender would charge 3.5% on top of that for a borrower interest rate of 5%.
- Credit premiums. Securitized lenders charge a credit premium over the U.S. Treasury price to provide an extra yield and entice bond investors to buy. If issuers don’t pay a higher interest rate, there is no incentive for bond investors to leave the safety of government bonds for private securities.
- Charging for profit. Lenders may also add basis points to the interest rate to satisfy the lender’s profit goals.
- Macroeconomic issues. During times of volatility, bond investors demand higher yields to take on the risk of buying mortgage-backed securities. When global economic concerns are front-and-center, lenders may have to offer higher yields due to bond investors’ views that that the securitization market has become risker. This may translate into higher interest rates for the borrower. When the economy is doing well and risk is low, yields may also be lower, which is a benefit to the borrower.
What else can affect a borrower’s interest rate?
As we mentioned earlier in this post, factors specific to the portfolio itself may also impact the interest rate. These factors can include the type of loan a borrower chooses, as well as factors that relate to the properties connected to the loan.
For example, B2R Finance offers five- and 10-year rates on portfolio loans, which are available for portfolios of 10 or more properties. It also offers a single-asset loan, which generally has higher rates than a portfolio loan.
B2R Finance also looks at other issues, including the property’s quality, demographics and its physical location. While these attributes won’t play into the interest rate, they may affect the loan-to-value that B2R is willing to lend on, with lower LTVs equaling lower rates.
B2R Finance offers rental investors innovative lending products to help unlock equity from existing portfolios and provide the cash needed to build rental portfolios nationwide. For more information about how B2R can help you obtain rental property financing, just call 800-227-8107 or visit http://www.b2rfinance.com/apply-now and follow us on Twitter @B2RFinance
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