Assumable Loans: A Multifamily Investment Strategy During a Rising Interest Rate Environment
The Federal Reserve raised short-term rates for the third time in 2022, and there is increased uncertainty within the capital markets and its potential impact on multifamily operators. Fed Chair Jerome Powell attributed the 75-basis point hike to the rising costs of goods, which accelerated by 8.6% in May, according to the most recent inflation report.
As with every rate adjustment, multifamily lenders must reassess overall risk, which has led to higher interest rates for investors. And with potentially further rate hikes on the horizon, this could also lead to tightening underwriting standards, and investors may have to bring more equity to the table as LTVs could push lower. This may result in loan qualifications becoming more difficult for some buyers.
As a result, assumable loans may become a strategy for many during this rising rate environment. An assumable loan is a loan held by a borrower that can be assumed or transferred to a new borrower before the loan’s maturity date. However, only specific types of loans can be assumed, such as those originating from Fannie Mae, Freddie Mac, HUD multifamily, CMBS, and life insurance companies.
Assuming a loan is an attractive alternative to obtaining new financing, especially given the opportunity to secure a lower interest rate than the current market average. New borrowers will also avoid a plethora of lender fees, and typical costs are roughly a 1% fee and a processing fee. Although, it is essential to note that new borrowers will still have to qualify for the assumed loan.
Assumable loans are also a way for sellers to avoid prepayment penalties. These fees are generally expensive to investors, and some loans also have lockout periods that prevent prepayment for several years. Finding a new borrower to assume the loan allows the owner to save significant time and money during the disposition process.
Please see below for more information on our current offerings with assumable loans:
