While it’s easy to pick a magical number that’s lower than the competition and sell the hell out of the product, it’s a little more complex than that. Lenders usually operate on the treasury rates. Typically speaking, the 5 and 10-year are the most common. They take that rate, then add their spread, and that’s where they get their rate from.
For example: as of this morning, the 5-year trades at 4.38%. Lenders who go off the 5-year, will take that 4.38% and add their spread. Speaking amongst many lenders, their spreads usually range from 3 – 3.5%. From time to time, lenders will get a little desperate for market share and will take a measly 2.75% spread over the treasury, but don’t expect it to last long, as there’s not much profit on the table for them after all expenses.
Your credit tier plays a roll as well. The lower the score, the higher their risk with loans. Therefor, they’ll increase their profit spread. If you’re sporting a 680 credit, expect them to add around 3.75 – 4% to the treasury price.
So, who determines the treasury price? The market. It’s often random and unpredictable. We’ve seen inflation reports come in much better than anticipated, yet rates went up 15 bps. We’ve seen unemployment numbers come in higher, and rates come down. Yeah, I know. It’s a weird system, but the market takes the overall economy as a whole and values it. As of this writing, both the 5 and 10-year treasury are at 5-year highs. When it comes to treasury rates, highs is not a good thing.
Remember when DSCR rates were 4%? One of my lenders was even around 3.75% with max leverage and no buy down. It was in 2021. You’ll notice the 5-year traded at around 30 cents… No, that’s not a typo. You take the 30 cents trading price + the lenders spread, of lets say, 3.5%, and poof… you get around 4% rates.
Hopefully this sums it up quickly and easily.