Interest-Only Freddie Mac Small Balance Loans
Freddie Mac’s Optigo Small Balance Loan program offers partial and full-term interest only (I/O) loans to eligible borrowers. In fact, nearly all Small Balance Loans come with a standard interest-only period at the beginning of the loan, which is based upon the loan’s fixed-rate period. For 5-year fixed rate loans and 5/15 hybrid ARMs, the I/O period is 1 year, for 7-year fixed rate loans and 7/13 hybrid ARMs, the I/O period is 2 years, and for 10-year fixed rate loans and 10/10 hybrid ARMs, the I/O period is 3 years.
However, for properties in Small and Very Small Markets, partial term I/O loans are only available for loans with 7-year fixed-rate periods (1 year I/O period) and loans with 10-year fixed rate periods (2-year I/O period). I/O years may be added or subtracted for 4 basis points (0.4%) addition to or subtraction from the overall interest rate.
Full Term Interest-Only Small Balance Loans
In addition to the 1-3 year I/O periods that come standard with the Optigo SBL program, borrowers can opt for full-term interest-only financing, though this comes with additional restrictions. Terms for full-term interest-only loans vary by market size, and are listed below:
- Top Markets: 80% LTV, 1.35x DSCR
- Standard Markets: 65% LTV, 1.40x DSCR
- Small Markets: 60% LTV, 1.40x DSCR
- Small Markets: 60% LTV, 1.50x DSCR
The Benefits of Interest-Only Financing
Whether for a few years or an entire loan term, interest-only loans have significant benefits for commercial real estate borrowers. Most importantly, interest-only loans significantly reduce monthly mortgage payments, increasing cash flow, and allowing borrowers to use their savings to invest in other commercial properties (or other profitable, non-real estate investments.) However, interest-only loans greatly slow down the rate at which a borrower develops additional equity in a property, as all equity gains will be based on the market appreciation of the property, rather than the repayment of the loan principal.