No prepayment penalty vs 3 yrs vs 5 yrs for current market
Rental Property Investor · Philadelphia, PA · Member since 2023 · 68 posts · 17 votes
No prepayment penalty vs 3 yrs vs 5 yrs for current market
Most Popular Reply
Lender · Los Angeles · Member since 2023 · 19 posts · 7 votes
2yQuote from @Hyeseong Park:
What is the best option for prepayment penalty you think these days if I want to go with DSCR loans?
I assume that there is a big chance that the rate can drop a bit more due to elections at the end of next year so govern may decrease the interest rate. which means I should probably go with no PPP and do refinancing next year? what do you think the trend will be?
We have a no PPP DSCR product that also offers highly competitive rates in the arena.
We anticipate rates to continue to fall. No crystal ball, of course, but getting in with no PPP and refinancing in 12-18 months is a solid strategy.
29 Replies
- Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes2y
What's the difference in interest rate/loan cost?
- Lender · Springfield, MO · Member since 2023 · 104 posts · 78 votes2y
Hi @Hyeseong Park!
A lot of my clients prefer going with a three-year prepayment penalty (3-2-1). Less fees if you do want to refinance, but it also doesn't change the rate dramatically.
The issue with most lenders less than a three-year prepayment penalty is either the rate is much higher, they make you buy out the prepayment penalty, or both.
Personally, I think the three-year prepay is a great option because it gives you more flexibility, you aren't paying too much for it, and gives you the stability of a long-term loan if rates don't fall.
- Lender · Springfield, MO · Member since 2023 · 104 posts · 78 votes2y
Quote from @Caleb Brown:
What's the difference in interest rate/loan cost?
Depends on the lender of course, but typically going from the standard 5 year penalty, a 3 year penalty adds anywhere from 0.1%-0.25% to the rate. For anything less, the rate could be 0.5%-1% higher and/or more fees. I have seen 1.5 points + higher interest, and I have also seen just 0.5% to the interest rate for no prepayment penalty.
- 2yJay HurstBusiness MemberLender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
Quote from @Hyeseong Park:
What is the best option for prepayment penalty you think these days if I want to go with DSCR loans?
I assume that there is a big chance that the rate can drop a bit more due to elections at the end of next year so govern may decrease the interest rate. which means I should probably go with no PPP and do refinancing next year? what do you think the trend will be?
@Hyeseong Park Not all pre-pays are equal even in the same year. Most of the DSCR loans we do not have any PPP, but our PPP is for a few products is only a .375% cost on PRICE meaning it will only cost you an extra .375% upfront to not have any pre-pay at all. Where some products being sold are 5 year and extra 2-3 points to buy out. I suggest what ever you end up doing get multiple quotes and make sure you understand the cost.
Hurst Real Estate, INC4.989 Reviews - 2yAlex BekezaBusiness MemberLender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
Attempting to time the market is risky business. Compare the costs and debt service on today's rate with the longer prepay vs. the higher cost of the no PPP options AND the costs associated with a second loan (another round of origination, appraisal, processing, etc).
Investor Property Loan5306 Reviews - 2yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Hyeseong Park Keep in mind that if you refinance...you have to pay all of those closing costs again! So, the rate decrease would need to be significant for it to be worth it.
- 2yDevin PetersonBusiness MemberLender · Sarasota, FL · Member since 2022 · 2k+ posts · 664 votes
Anything more than 3 years is risky in my book. I generally advise investors to not be so greedy about the rate now and think about an exit strategy in the near future.
ProAlpha Capital56 Reviews - Rental Property Investor · Philadelphia, PA · Member since 2023 · 68 posts · 17 votes2yWhat does I have to pay all of those closing costs again mean? Don't they get included in the total amount that I will borrow at the closing?
Quote from @Andrew Postell:
@Hyeseong Park Keep in mind that if you refinance...you have to pay all of those closing costs again! So, the rate decrease would need to be significant for it to be worth it.
- Rental Property Investor · Philadelphia, PA · Member since 2023 · 68 posts · 17 votes2y
Quote from @Hyeseong Park:
What does I have to pay all of those closing costs again mean? Don't they get included in the total amount that I will borrow at the closing?Quote from @Andrew Postell:
@Hyeseong Park Keep in mind that if you refinance...you have to pay all of those closing costs again! So, the rate decrease would need to be significant for it to be worth it.
Also does any of you know if I need to show my bankstatement for DSCR loan application? As I bought the property and rehabbed with my whole cash, I don't have any mortgage on my property so want to know if I don't have to show my bankstatement.
- Rental Property Investor · New Braunfels, TX · Member since 2022 · 408 posts · 408 votes2yYou will probably have to show the last two months of your bank statements, they want to make sure you have enough reserves.
Quote from @Hyeseong Park:
- 2yErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
Quote from @Hyeseong Park:
Quote from @Hyeseong Park:
What does I have to pay all of those closing costs again mean? Don't they get included in the total amount that I will borrow at the closing?Quote from @Andrew Postell:
@Hyeseong Park Keep in mind that if you refinance...you have to pay all of those closing costs again! So, the rate decrease would need to be significant for it to be worth it.
Also does any of you know if I need to show my bankstatement for DSCR loan application? As I bought the property and rehabbed with my whole cash, I don't have any mortgage on my property so want to know if I don't have to show my bankstatement.
Lenders will require you to show some sort of bank account for monthly payments.
To qualify for a cash out refinance lenders will generally use the cash out received to satisfy the 6 months reserves requirement. If there's not enough cash out to satisfy 6 months of reserves, they may condition for a bank statement showing the remainder.
Not all lenders have this reserve requirement but most do.
LuxePrivate Investments LLC 572 Reviews - Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Hyeseong Park:
What is the best option for prepayment penalty you think these days if I want to go with DSCR loans?
I assume that there is a big chance that the rate can drop a bit more due to elections at the end of next year so govern may decrease the interest rate. which means I should probably go with no PPP and do refinancing next year? what do you think the trend will be?
5 years PPP is okay, why ? typical DSCR is min 7% ; with such rate your equity only increase 30% by year 12. So I don't even need to think about refinancing.
- 2yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Hyeseong Park yes, the closing costs are usually rolled in....but those are still costs. It's not "free" to refinance. So, if I save $25 per month on my payment...and it costs me $10,000 to refinance...then it would take me 400 months just to break even. And a 30 year loan is only 360 months. Keep in mind that lenders will try to "sell" you lots of things...always look at the true costs of what those things are. You do have to show bank statements to satisfy the reserve requirement for any DSCR loan...your lender should be able to tell you how much you need in "reserve" funds before you commit to them.
Hope all of that makes sense.
- Lender · Los Angeles · Member since 2023 · 19 posts · 7 votes2y
Quote from @Hyeseong Park:
What is the best option for prepayment penalty you think these days if I want to go with DSCR loans?
I assume that there is a big chance that the rate can drop a bit more due to elections at the end of next year so govern may decrease the interest rate. which means I should probably go with no PPP and do refinancing next year? what do you think the trend will be?
We have a no PPP DSCR product that also offers highly competitive rates in the arena.
We anticipate rates to continue to fall. No crystal ball, of course, but getting in with no PPP and refinancing in 12-18 months is a solid strategy.
- Lender · Los Angeles · Member since 2023 · 19 posts · 7 votes2y
Quote from @Andrew Postell:
@Hyeseong Park yes, the closing costs are usually rolled in....but those are still costs. It's not "free" to refinance. So, if I save $25 per month on my payment...and it costs me $10,000 to refinance...then it would take me 400 months just to break even. And a 30 year loan is only 360 months. Keep in mind that lenders will try to "sell" you lots of things...always look at the true costs of what those things are. You do have to show bank statements to satisfy the reserve requirement for any DSCR loan...your lender should be able to tell you how much you need in "reserve" funds before you commit to them.
Hope all of that makes sense.
Just to clarify, this may be the case with Guaranteed Rate, but bank statements are absolutely not necessary if you have funds in other accounts.
Also, I'm not sure what the line "lenders will try to 'sell' you lots of things" means. There isn't really much to sell. We should play much more of an advisory role rather than that of a salesperson. Lastly, every lender should be going over all fees associated with a new loan. No one likes surprises at the closing table.
- Rental Property Investor · Philadelphia, PA · Member since 2023 · 68 posts · 17 votes2y
Quote from @Logan Padilla:
Quote from @Andrew Postell:
@Hyeseong Park yes, the closing costs are usually rolled in....but those are still costs. It's not "free" to refinance. So, if I save $25 per month on my payment...and it costs me $10,000 to refinance...then it would take me 400 months just to break even. And a 30 year loan is only 360 months. Keep in mind that lenders will try to "sell" you lots of things...always look at the true costs of what those things are. You do have to show bank statements to satisfy the reserve requirement for any DSCR loan...your lender should be able to tell you how much you need in "reserve" funds before you commit to them.
Hope all of that makes sense.
Just to clarify, this may be the case with Guaranteed Rate, but bank statements are absolutely not necessary if you have funds in other accounts.
Also, I'm not sure what the line "lenders will try to 'sell' you lots of things" means. There isn't really much to sell. We should play much more of an advisory role rather than that of a salesperson. Lastly, every lender should be going over all fees associated with a new loan. No one likes surprises at the closing table.
What if I don't have any other assets? I heard that they usually go with 6 months reserve if I don't have any other assets to show besides my bank statement. What does 6-month reserve exactly mean? Do they take out 6-months of PI amount from the amount that I'm going to borrow?
- Lender · Los Angeles · Member since 2023 · 19 posts · 7 votes2y
Quote from @Hyeseong Park:
Quote from @Logan Padilla:
Quote from @Andrew Postell:
@Hyeseong Park yes, the closing costs are usually rolled in....but those are still costs. It's not "free" to refinance. So, if I save $25 per month on my payment...and it costs me $10,000 to refinance...then it would take me 400 months just to break even. And a 30 year loan is only 360 months. Keep in mind that lenders will try to "sell" you lots of things...always look at the true costs of what those things are. You do have to show bank statements to satisfy the reserve requirement for any DSCR loan...your lender should be able to tell you how much you need in "reserve" funds before you commit to them.
Hope all of that makes sense.
Just to clarify, this may be the case with Guaranteed Rate, but bank statements are absolutely not necessary if you have funds in other accounts.
Also, I'm not sure what the line "lenders will try to 'sell' you lots of things" means. There isn't really much to sell. We should play much more of an advisory role rather than that of a salesperson. Lastly, every lender should be going over all fees associated with a new loan. No one likes surprises at the closing table.
What if I don't have any other assets? I heard that they usually go with 6 months reserve if I don't have any other assets to show besides my bank statement. What does 6-month reserve exactly mean? Do they take out 6-months of PI amount from the amount that I'm going to borrow?
6 months of reserves means you need to have 6 months worth of payments (principal, interest, taxes, insurance + mortgage insurance and HOA, if applicable) in your account after closing. If you're doing a cashout refinance, you can use the cashout amount towards your reserve requirement.
Is there a specific reason you don't want to use bank statements for assets? I'm also happy to discuss this with you offline, if you would like?
- Rental Property Investor · Philadelphia, PA · Member since 2023 · 68 posts · 17 votes2yThanks for letting me know. And I see. Now I understand what 6month reserve. So I can't use the 6 months amount from my cashout I guess? You can reach out via DM and answer this. And the reason why I cannot use bank statement is that I don't have enough in my bank acc simply but have the house for DSCR loan.
Quote from @Logan Padilla:
Quote from @Hyeseong Park:
Quote from @Logan Padilla:
Quote from @Andrew Postell:
@Hyeseong Park yes, the closing costs are usually rolled in....but those are still costs. It's not "free" to refinance. So, if I save $25 per month on my payment...and it costs me $10,000 to refinance...then it would take me 400 months just to break even. And a 30 year loan is only 360 months. Keep in mind that lenders will try to "sell" you lots of things...always look at the true costs of what those things are. You do have to show bank statements to satisfy the reserve requirement for any DSCR loan...your lender should be able to tell you how much you need in "reserve" funds before you commit to them.
Hope all of that makes sense.
Just to clarify, this may be the case with Guaranteed Rate, but bank statements are absolutely not necessary if you have funds in other accounts.
Also, I'm not sure what the line "lenders will try to 'sell' you lots of things" means. There isn't really much to sell. We should play much more of an advisory role rather than that of a salesperson. Lastly, every lender should be going over all fees associated with a new loan. No one likes surprises at the closing table.
What if I don't have any other assets? I heard that they usually go with 6 months reserve if I don't have any other assets to show besides my bank statement. What does 6-month reserve exactly mean? Do they take out 6-months of PI amount from the amount that I'm going to borrow?
6 months of reserves means you need to have 6 months worth of payments (principal, interest, taxes, insurance + mortgage insurance and HOA, if applicable) in your account after closing. If you're doing a cashout refinance, you can use the cashout amount towards your reserve requirement.
Is there a specific reason you don't want to use bank statements for assets? I'm also happy to discuss this with you offline, if you would like?
- Lender · Los Angeles · Member since 2023 · 19 posts · 7 votes2yIf you’re doing a cash out refinance, you CAN use the cash out funds towards your reserve requirement.
Quote from @Hyeseong Park:
Thanks for letting me know. And I see. Now I understand what 6month reserve. So I can't use the 6 months amount from my cashout I guess? You can reach out via DM and answer this. And the reason why I cannot use bank statement is that I don't have enough in my bank acc simply but have the house for DSCR loan.Quote from @Logan Padilla:
Quote from @Hyeseong Park:
Quote from @Logan Padilla:
Quote from @Andrew Postell:
@Hyeseong Park yes, the closing costs are usually rolled in....but those are still costs. It's not "free" to refinance. So, if I save $25 per month on my payment...and it costs me $10,000 to refinance...then it would take me 400 months just to break even. And a 30 year loan is only 360 months. Keep in mind that lenders will try to "sell" you lots of things...always look at the true costs of what those things are. You do have to show bank statements to satisfy the reserve requirement for any DSCR loan...your lender should be able to tell you how much you need in "reserve" funds before you commit to them.
Hope all of that makes sense.
Just to clarify, this may be the case with Guaranteed Rate, but bank statements are absolutely not necessary if you have funds in other accounts.
Also, I'm not sure what the line "lenders will try to 'sell' you lots of things" means. There isn't really much to sell. We should play much more of an advisory role rather than that of a salesperson. Lastly, every lender should be going over all fees associated with a new loan. No one likes surprises at the closing table.
What if I don't have any other assets? I heard that they usually go with 6 months reserve if I don't have any other assets to show besides my bank statement. What does 6-month reserve exactly mean? Do they take out 6-months of PI amount from the amount that I'm going to borrow?
6 months of reserves means you need to have 6 months worth of payments (principal, interest, taxes, insurance + mortgage insurance and HOA, if applicable) in your account after closing. If you're doing a cashout refinance, you can use the cashout amount towards your reserve requirement.
Is there a specific reason you don't want to use bank statements for assets? I'm also happy to discuss this with you offline, if you would like?
- 2yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Hyeseong Park do you have a property that you are trying to refinance right now? And I should have been more clear...there are certainly ways to satisfy the "reserve requirement" but assets of some nature are required. If you have a cash out, then that can work...we usually aren't doing a cash out on the Refinance step though...that's why I'm asking if you have a property currently. Let me know.
- Rental Property Investor · Philadelphia, PA · Member since 2023 · 68 posts · 17 votes2y
Quote from @Andrew Postell:
@Hyeseong Park do you have a property that you are trying to refinance right now?
Yes and that's the only one investment property for DSCR.
- Rental Property Investor · Philadelphia, PA · Member since 2023 · 68 posts · 17 votes2y
Quote from @Logan Padilla:
If you’re doing a cash out refinance, you CAN use the cash out funds towards your reserve requirement.Quote from @Hyeseong Park:
Thanks for letting me know. And I see. Now I understand what 6month reserve. So I can't use the 6 months amount from my cashout I guess? You can reach out via DM and answer this. And the reason why I cannot use bank statement is that I don't have enough in my bank acc simply but have the house for DSCR loan.Quote from @Logan Padilla:
Quote from @Hyeseong Park:
Quote from @Logan Padilla:
Quote from @Andrew Postell:
@Hyeseong Park yes, the closing costs are usually rolled in....but those are still costs. It's not "free" to refinance. So, if I save $25 per month on my payment...and it costs me $10,000 to refinance...then it would take me 400 months just to break even. And a 30 year loan is only 360 months. Keep in mind that lenders will try to "sell" you lots of things...always look at the true costs of what those things are. You do have to show bank statements to satisfy the reserve requirement for any DSCR loan...your lender should be able to tell you how much you need in "reserve" funds before you commit to them.
Hope all of that makes sense.
Just to clarify, this may be the case with Guaranteed Rate, but bank statements are absolutely not necessary if you have funds in other accounts.
Also, I'm not sure what the line "lenders will try to 'sell' you lots of things" means. There isn't really much to sell. We should play much more of an advisory role rather than that of a salesperson. Lastly, every lender should be going over all fees associated with a new loan. No one likes surprises at the closing table.
What if I don't have any other assets? I heard that they usually go with 6 months reserve if I don't have any other assets to show besides my bank statement. What does 6-month reserve exactly mean? Do they take out 6-months of PI amount from the amount that I'm going to borrow?
6 months of reserves means you need to have 6 months worth of payments (principal, interest, taxes, insurance + mortgage insurance and HOA, if applicable) in your account after closing. If you're doing a cashout refinance, you can use the cashout amount towards your reserve requirement.
Is there a specific reason you don't want to use bank statements for assets? I'm also happy to discuss this with you offline, if you would like?
I just "can" use the cash out funds towards your reserve requirement or I "have to"?
- 2yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Hyeseong Park ok, give me the basics here of the transaction - what's the ARV of the property? How much do you owe on it currently? If you do have a mortgage, is it a hard money loan?
- Rental Property Investor · Philadelphia, PA · Member since 2023 · 68 posts · 17 votes2y
Quote from @Andrew Postell:
@Hyeseong Park ok, give me the basics here of the transaction - what's the ARV of the property? How much do you owe on it currently? If you do have a mortgage, is it a hard money loan?
I will DM you on this.
- Lender · Los Angeles · Member since 2023 · 19 posts · 7 votes2yYou don’t have to, but if you don’t have the reserves in a bank account or other asset account, it may be the only option for a DSCR.
Quote from @Hyeseong Park:
Quote from @Logan Padilla:
If you’re doing a cash out refinance, you CAN use the cash out funds towards your reserve requirement.Quote from @Hyeseong Park:
Thanks for letting me know. And I see. Now I understand what 6month reserve. So I can't use the 6 months amount from my cashout I guess? You can reach out via DM and answer this. And the reason why I cannot use bank statement is that I don't have enough in my bank acc simply but have the house for DSCR loan.Quote from @Logan Padilla:
Quote from @Hyeseong Park:
Quote from @Logan Padilla:
Quote from @Andrew Postell:
@Hyeseong Park yes, the closing costs are usually rolled in....but those are still costs. It's not "free" to refinance. So, if I save $25 per month on my payment...and it costs me $10,000 to refinance...then it would take me 400 months just to break even. And a 30 year loan is only 360 months. Keep in mind that lenders will try to "sell" you lots of things...always look at the true costs of what those things are. You do have to show bank statements to satisfy the reserve requirement for any DSCR loan...your lender should be able to tell you how much you need in "reserve" funds before you commit to them.
Hope all of that makes sense.
Just to clarify, this may be the case with Guaranteed Rate, but bank statements are absolutely not necessary if you have funds in other accounts.
Also, I'm not sure what the line "lenders will try to 'sell' you lots of things" means. There isn't really much to sell. We should play much more of an advisory role rather than that of a salesperson. Lastly, every lender should be going over all fees associated with a new loan. No one likes surprises at the closing table.
What if I don't have any other assets? I heard that they usually go with 6 months reserve if I don't have any other assets to show besides my bank statement. What does 6-month reserve exactly mean? Do they take out 6-months of PI amount from the amount that I'm going to borrow?
6 months of reserves means you need to have 6 months worth of payments (principal, interest, taxes, insurance + mortgage insurance and HOA, if applicable) in your account after closing. If you're doing a cashout refinance, you can use the cashout amount towards your reserve requirement.
Is there a specific reason you don't want to use bank statements for assets? I'm also happy to discuss this with you offline, if you would like?
I just "can" use the cash out funds towards your reserve requirement or I "have to"?
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