Fixed-Rate and Variable-Rate Loans and the HUD 223(f) Program
When it comes to the acquisition or refinancing of a multifamily property, investors typically have two options: fixed-rate loans and variable-rate loans. Fixed-rate loans, like the HUD 223(f) loan, maintain the same interest rate througout the entire life of the loan product. In contrast, variable-rate loans have interest rates that change throughout the loan's life. Variable-rate loans, which are also known as adjustable-rate or floating-rate loans, typically have an interest rate that's based on a specific index, such as the 1-year LIBOR index. Depending on the exact nature of the loan agreement, the loan then adjusts after a specific period, such as 1 month, 6 months, or 1 year.
The Benefits of Fixed-Rate Financing for Multifamily Developments
While variable-rate loans may start out with a lower interest rate than a comparable fixed-rate loan product, fixed-rate loans have many benefits in the long run. This is especially the case for multifamily investors who want to hold onto their property for a while. Perhaps most importantly, fixed-rate financing gives investors the ability to make accurate expense projections for years to come. In comparison, with variable-rate loans, investors can only determine their future interest payments within a certain range.