borrower. The challenge for those serving this market
is two-fold: how to structure a loan with an interest
rate that can ultimately save borrowers money, and
how to communicate the true cost of the loan to prospective borrowers.
An important component of many fix-and-flip loans
is the ability to finance construction costs, which typically get disbursed over the life of the loan through
construction draws. Instead of rolling those costs into
the initial loan payment, lenders will sometimes charge
interest only on funds that have been dispersed.
When examining mortgage products for clients in
the fix-and-flip space, there are two key questions that
should be asked:
n Will the borrower pay interest on the money required
for the rehab as funds are dispersed over time or will
the investor pay interest on the full amount of the
loan, including the complete construction budget,
regardless of the disbursement schedule?
n What will the disbursement timing and frequency
This is most apparent when looking at the total
interest expense for loans that charge interest only
on funds disbursed versus a loan in which the lender
charges the same interest rate on the full loan amount
established when the loan closes.
Let’s look at an example considering a $600,000 loan
with a 10 percent interest rate — assuming a $500,000
purchase price and an additional $100,000 rehab
budget to be paid out in five equal disbursements
over 10 months.
In the first month, the borrower pays $4,166.67 in
interest. That goes up to $4,333.33 after the first draw
in the second month, then $4,500.00 for the second
draw and so on. A borrower who takes the full amount
upfront would pay $5,000 interest each month.
Under this scenario, the first borrower would
actually pay $55,833.33 of interest at the end of the
first year compared with $60,000 for the second
borrower. That’s a savings of more than $4, 100 for the
first borrower, with a lender charging interest only on
funds disbursed. In that scenario, the actual interest
paid would net out to a 9. 3 percent interest rate
compared to the quoted 10 percent.
It’s important for originators to clearly explain
exactly how borrowers will be impacted by the interest
rate based on the loan structure. Such nuances can
add significant cost for investors — especially those
financing large portfolios that contain anywhere from a
handful to hundreds of residential properties.
Robert Greenberg is chief marketing officer at Patch of Land.
He is responsible for branding, corporate communications,
lead generation, marketing automation and managing
integrated-marketing activities. Prior to Patch of Land,
Greenberg led the marketing efforts for B2R Finance, where
he helped originate more than $1 billion in real estate investor
loans that led to the industry’s first-ever multi-borrower,
single-family rental securitization. Reach him at
The Interest Rate Shouldn’t
Be the End of the Discussion
Sophisticated borrowers will value originators who provide
a nuanced picture of loans
By Robert Greenberg
While the interest rate is certainly important for real estate investors and homebuyers alike, the wide variety of loan products available
in today’s market makes it critically important for
mortgage originators serving real estate investors to
understand the nuances among these products and
the benefits to their clients.
These nuances could create a situation where a
higher interest rate loan can ultimately cost a client
less over the life of the loan depending on how the
loan is structured. As conventional mortgage lending for residential owner-occupants became more
homogeneous in the wake of the financial crisis,
business-purpose loans for residential investment
properties became more innovative and more widely available from a variety of lenders offering different products to meet the unique needs of real estate
As traditional banks and nonbank mortgage lenders
were tightening up credit and dealing with a flood of
owner-occupant delinquencies, defaults and foreclosures, the real estate investment space began to see
exciting changes and innovation in mortgage products and lending platforms.
As housing prices declined during the housing crisis, real estate investor interest in buying significantly discounted properties began to skyrocket. Online
lending platforms using sophisticated algorithms to
underwrite loans based on asset value and cash flow
rather than a borrower’s personal income came to the
forefront in a meaningful way to meet the demand for
real estate investment financing.
Many of the online platforms serving the needs
of real estate investors didn’t exist prior to the housing crisis. Before they emerged, residential real estate
investors, especially in the fix-and-flip market, typically turned to local hard-money lenders for their
With these additional financing options, mortgage
originators should be well-versed in the nuances of
different loan programs to steer their clients into loan
products that make the most sense. Frequently, in an
investment scenario, that is the loan program that offers the lowest cost of capital to the borrower.
For instance, in the fix-and-flip lending space, some-
times a purchase and rehab loan at a higher interest
rate can actually result in a lower-cost option for the
While real estate investors are often sophisticated
borrowers who are comfortable leveraging cash to
grow their portfolios more quickly, the loan terms
can be complicated and the actual costs not readily
apparent without analyzing the details.
It would be advantageous for mortgage originators
to take two potential loan agreements with different
scenarios on how the interest rate is charged and place
them side by side. Then, do the necessary calculations
to determine which financing approach works best for
a particular situation.
Investors will value a mortgage professional who
is taking the time to provide a comparison of interest
payments associated with differing construction-draw
schedules, for example. Providing these calculations
can help borrowers better determine which schedule
makes the most sense for their particular situation.
As is evident in the example provided, the best
deal could be the loan product that has a higher
interest rate — the one that on its face an investor or
borrower might label as the more expensive option.
Yet, in some scenarios, that higher-rate loan product
may actually be the one that can save the client several
Satisfied customers who feel their mortgage originator truly understands the nuances of the innovative
loan products now available are more likely to become
return customers. That’s especially the case when
they are able to save money on financing that can
ultimately be put to work expanding their real estate