March 27, 2014
Most community banks borrow money wholesale and sell it to you as an investor in apartment buildings at retail. So how are apartment loan rates determined? Most banks borrow money from other banks or from the Federal Reserve, and almost always on the short term (which means they have to pay it back on the short term). These community banks know their cost of funds and add on a margin of profit.
Apartment loan rates start with what is called an index, such as U.S. Treasury Yields, the Federal Funds Rate, or Prime Rate. A margin of basis points (each basis point is one hundredth of a percent) is then added to the index to determine today’s apartment loan rates. For example: today’s rate on a 10-year fixed Fannie Mae apartment loan is determined by adding the 10-year treasury yield (the yield on U.S. government bonds), 2.74%, to a spread of 2.25%, for an apartment loan rate of 4.99% on a 10-year fixed rate mortgage. Many apartment building construction loans are tied into prime rate as the index. An example would be the prime rate index of 3.25% plus a margin of 1.50%, which would be a rate of 4.75%.
By Terry Painter, President of Apartment Loan Store and Business Loan Store