We’ve coined the term “permanent rental” to describe the rental properties investors plan to hold on to long-term, maybe even bequeath to their estates. These investors are interested in the lifetime cost of the loan and are willing to pay more upfront to have lower interest rates and, thus, a lower lifetime cost associated with the loan. Our permanent rental investors typically are drawn to our 30-yr fixed rate product, with our 5-year prepayment penalty option, and often choose to pay more fees upfront (3%-5%) to lower their interest rate. Here’s an example for you showing the benefits of this approach.
Let’s say an investor with a 740 credit score is interested in purchasing a $350,000 rental home. The home generates a 1.3 DSCR at a loan-to-value, or LTV, of 80%. If this investor chooses to pay our standard 2% origination fees and selects our 30-yr fixed product with our 5-year prepayment penalty, here is what their origination fees, interest rate, monthly payment and total interest cost over the lifetime of the loan would be*:
- Origination Fee: $5,250
- Annual Interest Rate: 6.1%
- Monthly Payment: $2,011
On the other hand, let’s say this same investor chooses to buy down their interest rate by paying a 5% in origination fees. Again, using our 30-yr fixed rate product with our 5-year prepayment penalty, here is what their origination fees, interest rate, monthly payment and total interest cost over the lifetime of the loan would be*:
- Origination Fee: $13,125
- Interest Rate: 5.2%
- Monthly Payment: $1,861
By buying down their interest rate, this investor reduces their monthly payment by approximately 7.5% and will break-even against the additional origination fees they paid in less than five years. They also will save more than $45,000 in total interest costs over the life of the loan. At Visio, we provide investors options so they can tailor their loans to their particular investment needs. See some of our recently closed permanent rentals.
*Obviously, our fees, rates, and terms have changed over time and likely will change in the future, so contact your Visio Account Executive to obtain a current quote.
More posts by CEO Jeff Ball: Why Might Someone Rent in 2019 When They Could Afford to Buy?, Financing Challenges for Vacation or Short-Term Rentals,