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As interest rates for rental properties finally start to fall after a couple of years of painful heights, many real estate investors are renewing their interest in interest rates again. With lower rates, especially on the popular DSCR loan product that allows qualification primarily based on the DSCR ratio, a comparison of rents and expenses (including interest expense), instead of the DTI ratio based on personal income, rental property purchases financed through these loans are starting to look very attractive again.
We’ve covered DSCR loans here on BiggerPockets, including a guide on how interest rates and fees are primarily determined by three key metrics: LTV ratio, DSCR ratio, and credit score. We’ve also put out an advanced strategy guide that shows how additional secondary factors also help determine your rate—such as prepayment penalties, fixed vs. ARM structure, and rent qualification type (i.e., LTR vs. STR, etc.).
However, we’ll go further and show you exactly how these factors are utilized to get that exact interest rate number you are quoted, pulling back the curtain on how DSCR lenders and mortgage brokers calculate the rate and points you see on your DSCR quotes.
Rate Sheets and Scenario Tools: The Calculator Built for Brokers and Lenders
Despite often appearing complex and sometimes esoteric, the tools utilized to create your rate are not much different than a semi-basic calculator tool and involve pretty straightforward math. Lenders will typically start every day with what’s called a “rate sheet,” which shows a range of interest rates from the lender’s minimum rate and maximum rate.
Each interest rate—typically offered in 12.5-basis point increments, or an eighth of a percent—has a corresponding “premium” number, typically around 100. These are called the base rates and serve as the starting point for calculating the interest rate on a mortgage loan.
In addition to these base rates, the rate shee…
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