Is 8.875 a good Dscr rate today

[Ifeanyi Onyeonwu]

I am unsure if the rate is good. I am concerned about the prepayment penalty of 11k if refinanced before 5 years ( would have paid 120k but 10 to principal) on a 220 cash loan

[Stephanie P.]

Quote from @Ifeanyi Onyeonwu:

I am unsure if the rate is good. I am concerned about the prepayment penalty of 11k if refinanced before 5 years ( would have paid 120k but 10 to principal) on a 220 cash loan

In two sentences, you brought up some really good points for all DSCR borrowers to ponder.

1.  Rates aren't where they were a year ago.  They're in the mid to high 8's with a couple to few points at 80% loan to value.  How do you get it lower?  Pay discount points to reduce the rate or pay to get the ltv lower.  Rates are not going down in the near future.  They're actually getting back to normal.

2. If you are in the DSCR world, you will encounter a pre payment penalty. There's no getting around them. What you do with it is up to you, but because these loans are inherently risky (no income verification always is) and you're asking lenders to put up their money to fund your venture, while not asking you for much other than a minimum of 15% down, they are going to ask for a specific return on their investment. That's all a pre payment penalty is; an assurance that the lender is going to get x amount of interest over the first few years of the loan.

3.  If you did the math and you would have paid 120K, but only 10k to principal, then you understand how amortization schedules work.  The amortization schedule doesn't change with the rate so you're going to pay a little bit of principal in the beginning regardless of the interest rate. 

4.  No matter what you do, a mortgage loan is a tool and not every tool works for every situation.  That's why there are so many variables.  If you're a long term hold person, then a 2 year interest only loan with no prepay makes NO sense, but if you're looking to acquire the property, stabilize it and count on a value increase before you sell it, it makes all the sense in the world.  You see, it's up to you and how you want to or have the means to structure your loan.

Get a good mortgage broker to help you sort this all out.  Have conversations with a few and go with the one that you trust the most.  Rate, while important, isn't everything.

Stephanie