How to size Fixed vs Floating in today’s market
From a borrowers perspective. We are acquiring an asset that we plan to hold for 5 years. What’s the best way to evaluate? Just simply SOFR curve projection vs fixed?
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Depends... do you want to take floating rate risk or fixed rate? Most fixed rate product will be much lower leverage. If you take a floater, what will the rate cap requirements be?
I think you probably want to run multiple scenarios and obviously be mindful to build your model that you can quickly make adjustments to the index rate, strike price on cap, spread, etc.
Probably helpful to call a reputable mortgage broker in your market, they can guide you through it. Plus a good mortgage broker should be able to canvas the market & get you the best terms available today.
Think you're on the right track. Agree on mortgage broker unless you have some relationship lenders.
For fixed model the corresponding term UST + top end of broker quoted spread + fees.
For float SOFR curve + top end of broker quoted spread + fees. I would also model a SOFR floor ~150 bps lower than index at close and a rate cap.
Prepay structure seems like it is/should be on your radar here.
There are a lot of small details in the docs that move the needle just as much as spread but that varies lender to lender.
Also everyone wants 5Y fixed right now and lenders are being very selective with this product right now.
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