Refinance rate 10.5%?

Question

Hello, I am currently looking at doing a cash out refi on a rental property that I inherited. I recently renovated the property and put about 15k into remodeling bathrooms, floors, paint, etc. This property has no mortgage so the goal here is to leverage the equity to be in a strong position to purchase 1-2 investment properties in the near future (2023). I was recently offered 10.5% rate at 70% LTV. Right now I am cash flowing $1700 a month after HOA/Insurance expenses. After reviewing the loan details I am looking at an estimated monthly payment of $1797 a month. This will leave me about -$100 cash flow a month. Because of my current DTI situation I asked my mortgage broker to look for a DSCR product.

1.  I know today's mortgage rates are at about 6.5%.  Are the interest rates on DSCR loans typically 3-4% higher than current market rates for conventional?

2. This was just the first offer and I haven't responded to the mortgage broker's email yet but I feel as though I am being taken advantage of.  Also I was thinking that having more of a cushion at least ($300-$400) cash flow can help me with unexpected cap X and other issues that may come up.  Am I being unreasonable to think that this rate is ridiculously to high even with todays rates?

3.  Any reccomendations, I was thinking maybe a HELOC but I hear that getting a HELOC on an investment property is much more difficult than a cash out refi.  Any suggestions/advice would be much appreciated.

-Rookie Investor.

Stacy Raskin · Answer

@Stevenson Alexis, if you are cash flowing and you have zero debt on the property, then the rate sounds high. Really your DSCR rate will be determined by a couple main factors:

1. Credit score- the higher the best. 760+ gets best pricing for investment property loans with most lenders

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. Are you cash flowing the property? Is your DSCR ratio greater than 1-meaning are you cash flowing. 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. 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

Nick Belsky · Answer

@Stevenson Alexis

Slow down a sec.  #1.  DSCR loans do NOT run 3-4% higher than conventional.  I don't think I've ever seen them more than 1.5%.  If you are talking to lenders charging those rates, then you are definitely talking to the wrong lenders.  We are still writing loans at 7.125-7.625% on 30yr notes for DSCR.

#2. Always get more than one offer for lending.

#3 HELOC rates are nearly as high as investment rates right now.  The ones that are much lower are usually interest only or a floating rate.

Definitely need to speak with some more lenders or work with a mortgage broker who teaches.

Cheers!

Brian M Sweeney · Answer

10.5% is way too high. You can get better than that on a refi right now.

Erik Estrada · Answer

10.5% is what I am seeing on bridge loans at 80% LTV.

I am also seeing 5/1 ARMS in the high 7s, low 8s depending on experience, FICO, and LTV.

10.5% sounds very high, especially working with a broker. I would shop around.

Brandon Beardt · Answer

Hi Stevenson,

I wouldn't necessarily say DSCR rates are 3-4% higher than conventional rates. It usually just depends on the different deal specific loan level pricing adjustments (LTV, FICO, etc), which can be different for each lender.

Robin Cornacchio · Answer

What is average the penalty rate on a prepayment penalty?

Dylan M. Davis · Answer

This does seem high if this is a 1-4 unit. Floor rate for cashout 1-4 unit is 8.125%. My questions are: what's your credit like, is it currently occupied, when did you complete renovations... A private lender could do a cash-out if the property as-is value is >135K.

Albert Bui · Answer

HI Stevenson,

Conventional rates are upper 5’s to mid 7’s and possibly lower 8’s depending on where you’re at and how much you pay to get your rate and cost where you’d like.

The DSCR or rental programs are 7-10’s. They have their inherrent advantages like no DTI calculation or debt to income being calculated on the rest of your financial picture, they only concern themselves with the property you’re applying for and what its gross rents are in relation to the monthly mortgage payment. The dark side with these are that the rates/fee’s are higher and in high cost areas like yours in south FL, its hard to use DSCR because properties are pricey and rents relative to price (RV ratio - rent to value ratio) is very low. This is the same for us here in WA state seattle/bellevue or Orange County,CA where RV ratios re .30-.40% monthly rents to the price.

In these cases DSCR programs are very tough to use or you’ll have to use interest only or an ARM - adjustable rate mortgage and interest only to qualify or make the numbers work.

It’s always advised to seek conventional financing if you can qualify. Conventional is full documentation but it will give you a better execution overall if you can qualify.

Hope that info helps.

@Matthew Kwan@Carlos Valencia

Eliott Elias · Answer

DSCR loans are a lot higher than conventional, typically 2-3%. You're being taken advantage of, but not by the mortgage broker. They won't be able to drop rate enough to make you happy, best they can do is save you on points. This is the playing field right now, either this or rates back in the 2's ad everyone overbidding

Stephanie P. · Answer

Lots of factors go into rate; credit score, loan amount, DSCR number, cash out, units, and whether it's a refinance or not are just some of them.  I've seen refinance rates in the 7's and I'm seeing them in the 10's, but usually, as a good mortgage broker, if the rate is too high, I can find someone else that's lower.  Shop your rate.  Title seasoning could be an issue as well if you inherited the property.

All the best

Stephanie

Refinance rate 10.5%?

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