Freddie Mac Float-to-Fixed-Rate Loans (Two-Plus-Seven)
Freddie Mac Float-to-Fixed-Rate Loans have nine-year terms; a two-year period with a variable interest rate, followed by a seven-year period with a fixed interest rate.
Freddie Mac Float-to-Fixed-Rate Financing for Multifamily Properties
The Freddie Mac Float-to-Fixed-Rate Loan, also referred to as the Two-Plus-Seven, has an initial two-year period featuring a variable-interest rate, followed by a seven-year period featuring a fixed-interest rate. These loans are quite versatile, allowing for the financing of all conventional and affordable housing types, with the exceptions of student housing, seniors housing, manufactured housing communities, and pre-stabilized assets. Plus, borrowers can lock a coupon for the fixed-rate portion of the loan at initial closing, reducing their financial risk.
To learn more, check out Freddie Mac’s official Float-to-Fixed Loan (Two Plus Seven) Product Sheet or keep reading below for an in-depth explanation of the Freddie Mac Float-to-Fixed Rate Loan program.
Sample Freddie Mac Terms for Float-to-Fixed-Rate Loans in 2024
Size: Sized based on fixed-rate
Terms: 9 years: 2 years floating-rate, interest-only, 7 years fixed-rate
Amortization: Up to 30 years
Interest Rate:
Variable-rate: 1-month SOFR + 7-year floating pricing + 20 bps
Fixed rate: 7-year UST + 7-year fixed pricing + 20 bps
Very competitive interest rates
Loans are typically non-recourse
Automatic conversion to fixed-rate financing
Fixed-rate portion of the loan can be locked before closing
Supplemental loans allowed (starting in the second year of the fixed-rate period)
Typically requires third-party reports, including Appraisal, Phase I Environmental Assessment, and Physical Condition Assessment
Updated third-party reports required at conversion to fixed-rate financing (paid for by Freddie Mac unless additional loan funds are requested)
Application fee of $2,000 or 0.1% of loan amount required
2% rate lock fee usually required (refunded after Freddie Mac purchases loan, usually around 30 days post-closing)
Maximum LTV/Minimum DSCR: Sized based on fixed-rate
Prepayment Options: No prepayments allowed during the 2 year variable-rate period, defeasance permitted during the fixed-rate period
Timing: Typically 60-75 days from application to closing
Advantages
Disadvantages
Case Study: Buying in Indiana
George, an experienced real estate investor, identified a promising opportunity to expand his portfolio in the Midwest city of Lafayette, Indiana, a community experiencing consistent growth. His acquisition target was a relatively new, well-kept 30-unit multifamily property on the market for $3.7 million.
Keen to make the most of this investment opportunity, George decided to finance the acquisition using a Freddie Mac Float-to-Fixed-Rate Loan. This financing option allowed him to enjoy two years of interest-only payments at a variable rate, followed by seven years of fixed-rate terms. It aligned perfectly with his financial strategy, enabling him to reinvest the early years' savings into the property and the local community.
To secure the loan, George applied for an amount of close to $2.9 million, maintaining a robust 80% loan-to-value (LTV) ratio. The Float-to-Fixed-Rate Loan, with its automatic conversion to fixed-rate financing after two years, offered George the financial predictability he needed for his long-term investment plans. He was also able to lock in the fixed rate at the initial closing, providing additional stability.
Complying with loan requirements, George obtained necessary third-party reports, including a property appraisal, a Phase I Environmental Assessment, and a Physical Condition Assessment. These were essential for the lender's underwriting process and served as a valuable risk management tool for George, providing him with a comprehensive understanding of his investment.
Through the Freddie Mac loan, George successfully acquired the multifamily property in Lafayette. The Float-to-Fixed-Rate Loan's unique structure provided him with the financial flexibility he needed to capitalize on this exciting investment opportunity in an expanding market.
This is a fictional case study provided for illustrative purposes.