SBA 504 loan rates mean many things to many people. Unlike a residential mortgage rate, 504 rates consist of many different components. In general the fees that go into a 504 Rate are set annually and go into effect from October 1 to September 30 every year.
You may hear terms like note rate debenture rate, effective rate, and all in rate. One thing is for certain, unless you pay no fees, pay your loan on the due date every time, and keep the loan until maturity, no rate quoted will actually capture the rate you actually pay.
Lenders do their best to estimate what the rate will be. In the case of 504 loans, the rate always starts with a Note Rate. When your loan is ready for funding, it is packaged with every other 504 loan across the country most CDCs publish an All In Rate. The All In Rate is an aggregation of the Note Rate, which is set once a month, plus an SBA ongoing borrower fee, a CDC servicing fee, and a CSA (Central Servicing Agent) ongoing fee. This rate is the CDCs estimation of what the rate will be. It is a bit art, a bit science, and perhaps a bit magic.
The Effective Rate is the Funding Company’s estimation of what the rate will be over the life of the loan. It is a rather complex calculation. If you hold the loan over the entire term (10, 20, or 25 years) and make all payments on the due date, it will very closely match the actual rate paid. Since many loans may not make it to maturity due to prepayment or refinance, it is unlikely that your actual rate will match the effective rate. The best way to think of the 504 advantage is, the rate is fixed for the life of the loan. Interest rate volatility is removed from the equation. This can be huge. If rates go down, you can always refinance. If rates go up, it won’t impact you and can save you thousands in increased loan payments.
For example, we have a borrower who has been paying 3.75% on a bank first mortgage loan that was originated five years ago. The rate is about to reset for the next five years at 6.4% for the next five years. It was a rather large loan with a monthly payment of $55,270 per month. With this rate adjustment, the payment will be $68,955 for the next five years. The 504 payment will not increase. Granted, this was a large loan, but in general this is a 25% increase in monthly payments. If your loan amount was $1,000,000 and you were paying $5,141 per month, when the rate changed, you would pay $6,414.
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