Fixed Rate Loans and the Freddie Mac SBL Program
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.