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Mortgage Online at 425.com
1-866-449-7263 Commercial mortgage strategies in the face of changing interest rates We all got a little spoiled, what with sub-7% interest rates being the norm for so long. What do you do when Treasury rates are rising yet you still need to borrow? You might have a balloon payment coming due or you've just gone into contract to buy a terrific property? At a spread of 220 - 270 basis points over the 10 year Treasury as of early August 1999, you'd be in the range of 8.2% - 8.7%. If you're of the opinion that Treasurys are bound to dip sometime in the next year or two, (10 year Treasury rates can easily swing 10 - 15 basis points in a single day!), then there are creative alternatives to five or ten year fixed rate mortgages that you may wish to consider. We has been arranging some mortgages with an interest rate that floats over LIBOR (the London Interbank Offered Rate). At 180 basis points above LIBOR the borrower's rate is a cool 6.9%. The rate on the 30 day LIBOR-based loan will adjust every 30 days. LIBOR, however, has proved itself to be a very stable index. So beginning with the premise that a multi-family or other commercial borrower is starting out with a rate that is 1%-1.5% lower then it's rate would be for a 5 or 10 year fixed rate mortgage, what happens next? We have been able to structure the ability to convert LIBOR-based floating rate loans into 10 year fixed-rate loans. In one recent example, we're working with a borrower that is floating at 180 b/p above LIBOR. Right now, this gives the borrower the lowest rate possible. Over time, he can watch and wait and when rates drop he can choose to lock in at 200 b/p over the 10 year Treasury. It's a nice option to have. If Treasurys remain where they are, or if they move even higher, the borrower will be even happier to be tied to LIBOR. Depending upon the lender, in many cases the borrower can choose a 30, 60, 90, 180 or even a one year LIBOR period. Prepayments may be made without penalty at the end of each LIBOR period. Everyone would love to have a low rate on a long-term mortgage, but in times of changing interest rates, it's nice to know there are good alternatives in the meantime. |