Commercial Versus Conventional Loans

[Jake Meir]

Hello, This is my first post and have been reading a lot and appreciate everyone's advice. I own a duplex that is worth about $500k, and owe about $220k. It currently has a 3.25% 30 year fixed rate with about 23 years remaining. I would like to take out around 100-115K to fund more deals. This will depend on the appraisal but I am assuming it will have to be 75% LTV. I have been reading a lot of threads on bigger pockets and generally the consensus I see here is that many people prefer to use conventional loans - even with cash out refinances - due to their 'favorable terms' until they hit the 10 property fannie/freddie limit - and even then, they continue creative strategies around it and folks continuing using conventional. In the past, I think that may have made sense, because I had gotten quotes on commercial financing and it almost always was 1-1.5 points higher in interest rates, 5 year term with 25 year amortization. What I am seeing now with commercial is 3.5%, 5 year term, amortized for 25 years. Then I see with conventional, banks wanting 8-10K in points and and 4.25% for 30 years. Assuming interest rates stay low and there is not a collapse in the housing market, commercial seems like a better deal to me. The advantage with conventional is 30 year, no risk with interest rates (or at least not for 30 years!) and if housing markets decline, there is no risk where I would have to refinance and add in more equity (with housing prices where they are at now, it's not unimaginable that they could decline). I will add that interests rates have been declining for 40 years so I am not sure big a risk it is, although current monetary policy could indicate the need for raising rates. Advantage with commercial is easier loan process, title can be LLC, lower rate, and lower closing costs. Cons are interest rate risk and housing value decline risk. What are your thoughts, is conventional still the way to go or has freddie and fannie made conventional loans not worth it for cash out refinance investment properties? Or have we hit rock bottom on interest rates and heading into inflationary times (already there??). Bigger risk seems to be interest rate rising. Interested in your opinions, this does not seem as straight forward as when I looked at it in the past. Thank you!

[Jake Meir]

@Eric Johnson - I suppose that was a lot of text, so appreciate you reading through it! I’ll try to slim down in the future.

I just got a quote for conventional rate for 3% with 30 year fixed with only 2k closing costs. I looked at 3 other banks and all wanted 8-10k in points and 4.25-4.5. I figured most banks would be around that so I was very shocked.

My goals as an investor are to buy and hold, and grow as much as possible with brrrr strategy. I have a commercial loan too and appreciate the flexibility and will use that when appropriate, but this property is already operating great and I just want to pull out equity so terms are really important for this one.