Interest rates are spiking, what does this mean for real estate investors, and the broader housing market?
That additional debt service cost (monthly interest) can easily add $250 per month to the average mortgage payment. That's enough to eliminate most or all of your expected cash flow.
For those who are not investors but have plans to buy or sell a single family home, we expect prices to face considerable pressure, and it would be healthy for prices to decline to offset the increased financing costs.
The interest rates for DSCR loans used by real estate investors to finance rental properties are priced based on the 30 year fixed rate mortgage displayed above. Depending on DSCR strength, LTV, and borrower credit and investing experience, interest rated on DSCR loans range from 0.5% to 2% above the current 30 year conventional mortgage.
Fix and flip loans are short term loans, generally 3 to 18 months depending on the scope of work to renovate a property. Interest rates for bridge loans are based on the 6 month treasury yield and the 2 year treasury yield, shown below. Real estate private lenders and banks typically price bridge loans at the 6 month or 2 year treasury + 5% risk premium. Some lenders price higher than a 5% risk premium based on borrower experience.
Lenders also look at the 10 year treasury yield in order to price out loan products, such as adjustable rate mortgages that reset after 5, 7, and 10 years.