Agency loans are a competitive source of multifamily financing in any market. But the flexibility they offer can be particularly valuable amid interest rate uncertainty.

“Both Fannie Mae and Freddie Mac have tools that can help investors find financing that aligns with their business plan and keeps options open as rates shift,” said John Hofmann, Head of Agency Production at J.P. Morgan.

How interest rates affect agency loans

The interest rate environment generally doesn’t affect the agencies’ capacity to finance commercial real estate. As government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac help stabilize mortgage markets by providing consistent capital. 

However, agency interest rates for multifamily loans still tend to rise and fall with the broader market. 

When the Federal Reserve raises or lowers its benchmark rate, it influences agency interest rates in different ways depending on the type of loan: 

• Adjustable-rate loans: When the Fed changes the federal funds target range, it directly influences adjustable- or floating-rate loans indexed to short-term interest rates such as the 30-day Secured Overnight Financing Rate (SOFR).
• Fixed-rate loans: The Fed’s actions influence medium- and long-term fixed rates, but the correlation is looser. These rates price in the broader outlook for the economy and inflation, as well as expected future Fed moves.

Navigating interest rate uncertainty with agency loans

The Fed has projected it will lower its target rate this year, but predicting the timeline is challenging. Future cuts will depend on evolving economic and labor market conditions. 

“In this interest rate environment, sponsors are looking for options—including the option to adjust if rates drop,” Hofmann said. 

These strategies can help multifamily investors take advantage of the flexibility agency loans offer: 

1. Plan ahead and monitor rates

Volatility can create opportunities to lock in an attractive interest rate if you’re prepared to act fast. By submitting an application to the agencies well ahead of a deadline to refinance, you can more easily take advantage of even temporary rate shifts.

“When rates drop, agencies tend to get an influx of deals. If your paperwork is already in, you can be ready to move quickly, before rates rise again,” Hofmann said. 

2. Consider adjustable rates

Both GSEs offer floating-rate loans with terms between five and 10 years. 

“We’re seeing some sponsors move toward floating-rate debt due to the belief that rates will eventually drop,” Hofmann said. “They don’t want to lock in a long-term fixed rate right now.” 

Banks and other lenders, including insurance companies, also offer floating-rate debt, but agency loans typically offer competitive pricing, particularly for stable assets or sponsors seeking longer-term financing. 

J.P. Morgan is an approved provider for interest rate caps Fannie Mae and Freddie Mac require on adjustable-rate loans. 

3. Explore shorter durations

Agencies offer options for investors seeking shorter commitments through reduced loan duration and flexible prepayment options that lower refinancing costs. 

For instance, both GSEs offer floating-rate loans with a one-year prepayment lock-out period, followed by a relatively affordable 1% exit fee.

When choosing a loan duration, investors should consider how the maturity date aligns with other loans in their portfolio. 

“It’s important to ladder your maturities in case your loan matures during a period of stress in the capital markets,” Hofmann said. 

4. Work with a lender that provides options

Comparing multiple financing sources—agency, bank and insurance company debt—helps find the most competitive terms. However, during rate volatility, working with a single lender offering diverse options is especially valuable. 

Hofmann said his team often provides a bank loan as a “backstop” while preparing an agency loan in case rates rise during the due diligence process. 

“It gives the sponsor the ability to hit pause and wait for rates to come back down,” Hofmann said. “Having both options ready means you can be nimble.”