Many multifamily property owners and investors are facing loan renewals this year. It is time to revisit the options for financing.
In general multifamily operators are having a tough time, because when they took the initial loan five years ago in 2020, it was easy money. That doesn’t mean everyone is having problems finding a loan.
Where to Start Refinancing a Multifamily Mortgage?
So the first place to start with is your local bank. Go into the bank that you have a relationship with, and see what they can offer you! They know you well. They can open your checking account and see the real numbers.
Next place to go; is your current lender, and see what they offer you for a renewal. It is easiest and cheapest to refinance with your existing lender because you should now have a 5 year history with them.
(Do not be dejected if they say they can’t help you. Although people in the world of finance love talking about Character Character Character as the 3 C’s of lending. In reality, someone much higher up can change the firms directive, and it will prevent them from lending to you. )
We will now break down the pros and cons of each refinancing option for your $5 million multifamily property and identify which route might be the most ideal for your situation.
Go and see today’s commercial mortgage interest rates.
Local or Regional Banks
This is the ideal choice for Borrowers who value flexibility and have a strong relationship with a local or regional bank.
Pros:
- More flexible underwriting compared to large commercial banks.
- Willing to consider unique property or borrower circumstances.
- May offer relationship-based pricing or terms.
Cons:
- Interest rates may be slightly higher than agency or CMBS loans.
- Shorter loan terms (5-10 years) with balloon payments.
- May require personal guarantees.
Commercial Banks (National Banks)
They are made for companies with a larger portfolio of properties spread across the country. You will need to have strong credit and good financials to get more competitive rates. Also you need to be comfortable with stricter underwriting requirements.
Pros:
- Competitive interest rates.
- Established relationships with local banks can lead to more personalized service.
- May offer flexible terms if you have a strong financial profile.
Cons:
- Stricter underwriting requirements (e.g., higher credit score, lower LTV, higher DSCR).
- Shorter loan terms (typically 5-10 years) with balloon payments.
- May require personal guarantees.
HUD Loans (Fannie Mae, Freddie Mac)
HUD Loans are a popular choice for multifamily investors looking for long-term, stable financing and a non-recourse option. However the process is long, sometimes taking 3 or 4 months until the loan closes. Depending on the overall lending climate, there are times when HUD Loans are cheaper, and times when HUD Loans are not worthwhile pursuing.
Pros:
- Favorable terms, including lower interest rates and longer amortization periods (up to 35 years).
- Non-recourse loans (no personal liability).
- Designed specifically for multifamily properties.
- High LTV (up to 75-80%) and lower DSCR requirements (as low as 1.25x).
Cons:
- More paperwork and longer processing times.
- Prepayment penalties (multiyear prepayment lock, and then descending prepayment penalty rate).
- Property must meet specific eligibility criteria (e.g., occupancy, conditions ,environmental survey).
CMBS Loans (Commercial Mortgage-Backed Securities)
These loans are offered by the big investment bank like; Goldman Sachs, JP Morgan, Deutsche Bank, and Morgan Stanley. They are made for loan sizes typically ranging from $15 million to $75 million. So basically it is not an option for refinancing a $5 million multifamily property.
Pros:
- Non-recourse loans.
- Fixed interest rates.
- Higher LTV (up to 75-80%) and competitive rates.
Cons:
- Prepayment penalties can be steep (defeasance or yield maintenance).
- Less flexibility in loan terms.
- Complex and lengthy closing process.
- Servicing is handled by a third party, which can lead to less personalized service.
Bridge Loans
There are two types of bridge loans. Many people associate a bridge loan with a new property acquisition. However, bridge loans come in handy when your multifamily property is stabilizing, but lacking 2-3 years of stability that commercial banks and HUD lenders require for a refinance.
A commercial mortgage broker, or even a HUD Lender will many times recommend a bridge loan. The bridge loan will be used to provide the temporary financing you need to retire the current loan, and buy time until you can refinance to a long term HUD loan.
Pros:
- Quick access to capital (closing in as little as 2-4 weeks).
- Higher LTV (up to 75-80%) and interest-only payments during the term.
- Ideal for properties that need stabilization (e.g., low occupancy, renovations).
Cons:
- Higher interest rates (8-12% or more).
- Short-term financing (1-3 years) with balloon payments.
- Often require exit strategy (e.g., HUD refinancing or pending sale).
Which Option is Ideal for a $5 Million Refinance?
For a $5 million multifamily refinance, the best option depends on your financial situation:
If you want long-term, stable financing:
- HUD Loans (Fannie Mae, Freddie Mac) are likely the best choice. They offer competitive rates, long amortization periods, and non-recourse terms, making them ideal for many multifamily operators.
If you need flexibility and have a strong relationship with a local bank:
- Portfolio Lenders could be a good option, especially if you value personalized service and are okay with slightly higher rates.
If you want non-recourse financing but are okay with prepayment penalties:
- CMBS Loans are worth considering, though they are less flexible than HUD loans.
If your property needs stabilization (e.g., low occupancy or renovations):
- Bridge Loans can provide short-term financing, but you’ll need a clear exit strategy (e.g., refinancing with an agency loan later).
If you have strong financials and want competitive rates:
- Commercial Banks are a solid option, but be prepared for stricter underwriting.
For most multifamily property owners, Agency Loans (Fannie Mae, Freddie Mac) are the ideal choice for a $5 million refinance. They offer the best combination of low rates, long terms, and non-recourse financing, which aligns well with the needs of multifamily investors.
However, if your property requires stabilization or you need more flexibility, a Bridge Loan or Portfolio Lender might be better in the short term.
