Commercial Bank ARM Resetting? Try a 30 Year DSCR Loan

If you own a rental, whether it’s a single family home or a 10-plex, and you financed it through a bank’s commercial desk, there is a good chance your rate has an expiration date. Five years is common. When that date comes, the bank gets to reprice your loan at whatever the market is doing that day, and you get a letter. Rates, as you may know, have gone up quite significantly since many of these loans were written.

I want to talk about why that structure exists, why you are not stuck, and what options you have.

Who your commercial ARM really protects

Most small commercial loans on residential rentals are written with a fixed rate for a short window, often five years. After that, the rate adjusts or the balance comes due as a balloon. Most are amortized over 15 or 20 years, and in my experience they often carry a higher rate.

That setup works well for the bank. Every few years it gets to reset your rate to the market and often charge renewal fees. The rate risk sits entirely on your side of the table.

Here is what most owners never hear: on residential rental property, that structure is not required. From a single house up to 10 units, and even larger with some of my lenders, these properties can be financed on a 30 year fixed rate, even if you want the property owned by your LLC.

Why extending with your bank is not a fix

When the reset letter arrives, the natural move is to call your banker and ask to extend, renew or shave the rate a little. That feels like a solution. It is really just scheduling the next reset. You are agreeing to carry the same exposure for another five years.

I’ve never been the loan officer who tells someone going into a riskier loan that it’s OK because they can refinance later. That is not always the case, especially when better options are available. In the current environment, what if rates go up another few percentage points? Will your property still cash flow? Will you be able to put money aside for repairs? Protecting yourself is a decision you make now, not when the next letter shows up.

A better structure: a 30 year fixed with flexibility

A lot of owners like their 15 or 20 year payoff. Good. You do not have to give that up. What you give up is the reset.

The loans I use for rental property come with a 30 year term. That is not a limitation. It is the safety net. We lock a 30 year fixed rate, so the reset is gone for good. Then I build an updated amortization schedule that matches the payoff you already have, or any term you prefer, whether that is 10, 15 or 20 years, and you pay to that schedule with extra principal each month. If a vacancy, a new roof or a slow season hits, you are only required to make the 30 year payment. You pay it off on your timeline, and your lender never gets another chance to reprice you.

Will paying it faster trigger a prepayment penalty?

Many investment property loans carry a prepayment penalty for the first few years, so this is a fair question. Most include an annual prepayment allowance, often called a curtailment allowance, that lets you pay down up to 20% of the original loan amount each year without a penalty.

Here is how that plays out. Say you owe $300,000 on a 30 year fixed rate and pay it on a 15 year schedule instead. The extra principal works out to less than 3% of the original loan amount a year. That is nowhere near 20%. You would still have more than $50,000 of room in the first year before any penalty applied. The penalty comes into play if you sell, refinance, or drop a very large lump sum during the penalty period. Once that period ends, there is no limit at all. Before you sign, I will show you exactly what your loan allows.

Start with a quality broker, not just your bank

None of this means your bank is the bad guy. Local banks have their place. They know the area, they can hold loans on their own books, and they will sometimes make a loan nobody else will. If your bank turns out to be the best fit, I will tell you so.

The limitation? A bank can only offer its own menu. Yours may have a commercial loan and a DSCR option or two. As a broker, I work with over 300 wholesale lenders, and 100 of them offer DSCR loans. That means many different DSCR programs with different terms, unit limits and prepayment options. Start with someone who can lay all of those next to your bank’s offer. My job is to match the loan to your plan for the property, not to a lender’s plan for your loan.

Review your commercial loan now

If your rate resets or your balloon comes due in the next 12 months, now is the time to look at it, not six weeks before the date. Send me your mortgage statement, current rent roll, and insurance and tax bills, and I will lay out both paths side by side: what renewing with the bank looks like, and what a fixed rate on your own schedule looks like.

Call or text me at (504) 214-8402.

The example in this article is for illustration only. It is not a live loan scenario, a quote, or a commitment to lend. Approval, rates, terms and prepayment provisions depend on the borrower, the property and the lender. NMLS 79676 | NEXA Mortgage, LLC NMLS 1660690 | Equal Housing Opportunity.

Bernard Guste, Loan Officer, Nexa Lending

borrowlouisiana.com

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