Amortization in the Freddie Mac SBL Program
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Amortizing loans consist of loans in which each payment consists partly of principal, and partly of interest. This is in contrast to interest-only loans, which only consist of interest payments. Amortizing loans can come in two varieties; fully amortizing loans, in which the entire loan principal is paid off by the end of the loan term, and partially amortizing loans, in which a balloon payment is due at the end of the loan. The vast majority of multifamily loans (including most Freddie Mac multifamily loans) are partially amortizing, with some partial or full-term interest-only loan options. This also true of the Freddie Mac SBL program, where all amortizing loan options are partially amortizing, with some full-term interest-only loan options.
Related Questions
What is the amortization period for Freddie Mac SBL loans?
The amortization period for Freddie Mac SBL loans is up to 30 years. This is according to this source, which states that the loan terms for the Freddie Mac SBL program include "Amortization: Up to 30 years".
What are the benefits of amortizing a Freddie Mac SBL loan?
The benefits of amortizing a Freddie Mac SBL loan include:
- Lower monthly payments due to the principal being paid off over the loan term.
- The loan is fully assumable with a 1% fee and Freddie Mac approval.
- The loan is non-recourse (with individual exceptions for certain loans).
For more information, please see this article.
What are the risks associated with amortizing a Freddie Mac SBL loan?
The risks associated with amortizing a Freddie Mac SBL loan include:
- The loan principal is not paid off by the end of the loan term, so the borrower will be responsible for a balloon payment at the end of the loan.
- The borrower will be responsible for making regular payments of principal and interest.
- The borrower may be subject to stricter leverage and DSCR requirements in small and very small markets (1.30x and 1.40x DSCR, respectively, and between 70-75% LTV).
For more information, please see the following sources:
How does amortization affect the interest rate of a Freddie Mac SBL loan?
The Freddie Mac SBL program offers both fixed-rate and hybrid adjustable-rate mortgages. Fixed-rate Small Balance Loans are offered in 5, 7, and 10-year options, and hybrid ARM loans are offered as 20-year loans with 5, 7, or 10-year fixed-rate periods. All loans (both fixed-rate and hybrid ARMs) generally come with a 1-3 year interest-only (I/O) period at the beginning of the loan term, based on the length of the fixed-rate period.
Loans with a 5-year fixed-rate period come with a 1-year I/O period, loans with a 7-year fixed-rate period come with a 2-year I/O period, and loans with a 10-year fixed-rate period come with a 3-year I/O period. However, for loans in Small or Very Small Markets, this is reduced to a 0-year I/O period for loans with a 5-year fixed-rate period, a 1-year I/O period for loans with a 7-year fixed-rate period, and a 2-year I/O period for loans with a 10-year fixed-rate period.
Interest-only periods can generally be added or subtracted for a 0.4% addition or subtraction per year. For instance, a borrower with a 5-year fixed-rate loan with a 5% interest rate could extend their I/O period to 2 years, but to do so, they would need to pay an elevated interest rate of 5.4%. In contrast, the borrower could save money on interest payments by eliminating their I/O period altogether, and would only pay an interest rate of 4.6%. Adding I/O periods may not available for properties in Small and Very Small Markets.
The Freddie Mac SBL program also offers full-term interest-only loans, though these are held to stricter LTV and DSCR requirements. In Top Markets, full-term I/O loans are still permitted up to 80% LTV, but require a 1.35x DSCR, in Standard Markets, they are allowed up to 65% and require 1.40x DSCR, in Small Markets, they are allowed up to 60% LTV and require 1.40x DSCR, and in Very Small Markets, they are allowed up to 65% LTV but require a 1.50x DSCR.
Amortization affects the interest rate of a Freddie Mac SBL loan by allowing borrowers to add or subtract interest-only periods for a 0.4% addition or subtraction per year. For instance, a borrower with a 5-year fixed-rate loan with a 5% interest rate could extend their I/O period to 2 years, but to do so, they would need to pay an elevated interest rate of 5.4%. In contrast, the borrower could save money on interest payments by eliminating their I/O period altogether, and would only pay an interest rate of 4.6%. Adding I/O periods may not available for properties in Small and Very Small Markets.
What are the advantages and disadvantages of amortizing a Freddie Mac SBL loan?
The advantages of amortizing a Freddie Mac Small Balance Loan include:
- Lower monthly payments, as the loan is spread out over a longer period of time.
- The ability to pay off the loan faster, as the borrower can make additional payments.
- The ability to take advantage of lower interest rates, as the loan is spread out over a longer period of time.
The disadvantages of amortizing a Freddie Mac Small Balance Loan include:
- Higher overall interest costs, as the loan is spread out over a longer period of time.
- The potential for higher prepayment penalties, as the loan is spread out over a longer period of time.
- The potential for higher closing costs, as the loan is spread out over a longer period of time.