The 10-year treasury is the benchmark used to decide mortgage rates across the U.S. and is the most liquid and widely traded bond in the world. The current 10-year treasury yield as of January 10, 2019 is 2.74%. The charts below reflect the highs and lows of the 10-year treasury over the last 3 years. Since November 8, 2018 the 10-Year Treasury Yield has decreased by .50%.
10-Year Treasury Yield Highs
|December 12, 2016
|March 6, 2017
|November 8, 2018
|January 10, 2019
10-Year Treasury Yield Lows
|July 4, 2016
|September 4, 2017
|January 1, 2018
|January 3, 2019
Many multifamily apartment owners may be facing a balloon payment on a loan that is maturing in the next few years. The current loan may have a 3/5/7 or 10-year low-fixed rate with a large balloon payment coming due. The Federal Reserve has lowered their predictions down from three rate hikes to two for 2019. It appears that rates will be increasing in the next few years, however not as fast as originally predicted. This is a great time for borrowers looking to take advantage of the HUD FHA 223(f) program that offers a non-recourse, assumable, loan term up to 35 years that is fully amortizing. The HUD FHA 223(f) transaction offers low-fixed rate that is currently between 4% and 4.25%, based on the current 10-Year Treasury Yield.
There are many multifamily apartments owners that currently have HUD FHA 223(f) or HUD FHA 223(a)(7) loans. These projects may be in a position to refinance to a reduced interest rate, cash out equity to complete needed capital improvements, or cash out to add additional investment properties to their portfolio. A HUD FHA 223(f) refinance can be utilized to take advantage of a longer mortgage term, in addition to reducing their current interest rate, which in turn will reduce mortgage payments and increase cash flows.
Multifamily Apartment Occupancy Rates Are Rising
Over the last 5 years, multifamily apartments in a majority of markets have seen an increase in values, rents, and occupancy percentages. Many analysts are predicting that occupancy and rents will remain high, but the significant increases in values will not continue to be as drastic. The HUD FHA 223(f) allows up to 80% cash out that can be used to make necessary capital improvements and increase the value of the asset.
Using equity to update bathrooms, kitchens, and other amenities in your apartment community can justify an increase in rents to market rate if you currently are charging below market rate. Older outdated apartment complexes are unable to charge market rate rents and often times have higher vacancy rates. Many older apartment buildings can benefit from a variety of capital improvements to replace inefficient equipment and older model systems. New, efficient boilers and water heaters with temperature controls can be installed to cut the natural gas bills by as much as 50%. New windows and doors can have a significant impact as well. Many older apartments can also save on energy and water costs by installing high-efficiency gas furnaces, hot water heaters, insulation, and ENERGY STAR certified appliances.
In 2016, the Department of Housing & Urban Development’s (HUD) Federal Housing Administration (FHA) announced a multifamily insurance rate reduction program made to encourage capital financing of affordable and energy-efficient apartments. To qualify for the Green Mortgage Insurance Premium Reduction (Green MIP Reduction), owners must certify that properties have achieved or will pursue to achieve an ENERGY STAR score of 75 or better on a 1–100 ENERGY STAR score, using EPA’s Portfolio Manager.
The Benefits Of Refinancing Your Apartment Building
In times of increasing rates, properties that have very little equity can be at risk of not being able to obtain financing when their loan matures and a large balloon payment becomes due. Owners can risk losing their property, or be forced to sell their asset in a contracting real estate cycle. If there is only enough equity to be able to refinance at an increased rate, there is a likelihood that there will be a shortage of funds for capital improvements and only cover the necessary expenses to maintain the property. This could result in an increase in vacancies as tenants move to apartments that are superior with comparable rents.
Owners of apartment buildings need to weigh the costs and benefits of refinancing if there is a pre-payment penalty involved. There have been several instances where it makes perfect financial sense to absorb the pre-payment penalty and refinance at a significantly reduced interest rate. The benefits of a long-term, low interest fixed rate, have interest savings that far outweigh and exceed the cost of the pre-payment penalty. In many instances, pre-payment penalties can be included in the mortgage, and do not need to be paid out of pocket by the borrower to complete the transaction.
Borrowers looking to shorten their term can also benefit from refinancing at a reduced interest rate. Refinancing to a shorter loan term with a reduced interest rate can shorten the term by several years. In addition, a significantly higher portion of the mortgage payments will be applied to principal than to interest.
LSG Lending Advisors will be there every step of the way to help navigate and guide you through the process. We have the experience to size your transaction and provide you with a detailed proposal of terms and costs for you to make an informed decision.