The Real Estate Capital Institute®

Real Estate Capital Markets One Year Later

Mortgage Rates Rise by Three Quarters of a Percent with More Liberal Underwriting


Chicago, IL -- (ReleaseWire) -- 10/11/2006 --Over a year ago, income-property mortgage rates climbed, both short and long term. Prime and LIBOR-based debt rose by more than one-and-one-half percent. Long-term rates saw less dramatic spikes to the tune of about three-quarters of a percent.

During the past year, an inverted yield curve is the most obvious culprit of rate pricing dynamics. Last December, short-term rates crossed over and above the 10-year-treasury mark -- still the case today. LIBOR rates are up by nearly 45% and Prime by more than 25%. Since short-term debt (e.g., construction and line-of-credit) is more costly; borrowers are quickly converting to longer-term, fixed-rate loans where applicable. Yet other options are available which offer better pricing while retaining short-term flexibility.

In the first place, many construction lenders have narrowed their spread requirements by as much as 100 basis points or more. Competitive construction loans are had in the low-100-basis-point range for the right property. The net effect translates to construction pricing that is only about 75 basis points higher than last fall.

Second of all, more lenders are offering fixed-rate construction and permanent loans 'bundled' into a single loan. Mostly provided by life companies and pension funds, such creative debt allows borrowers to lock into a fixed-rate loan of, say 6%, covering both construction and perm.

Third of all, interest rate hedge programs are offered at lower costs than before because of the relatively flat yield curve. Also, fixed-rate forward-delivery mortgages are priced as low as a quarter point more than immediate funding loans, extending as far as 18 months.

Nat Zvislo, the Real Estate Capital Institute's research director, notes "Short-term lenders are staying competitive by offering a variety of liberal terms including reduced guarantees, lower fees and more generous loan amounts."

The Institute tracks both short and long-term rates on a daily, weekly and monthly basis dating back to 1990 ( Hourly rates are broadcasted via the Real Estate Capital Rateline at 7RE-CAPITAL (773-227-4825).