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The rate structure is another important aspect to understand about DSCR Loans, especially if you are exploring a structure beyond the overwhelmingly standard Fixed Rate option, which is simply an unchanging interest rate for the life of the loan and representative of the vast majority (estimated to be more than 95%) of DSCR Loans.
Loan structures that are Floating Rate, or when the interest rate changes from month to month or year to year during the life of the loan, are common in commercial real estate, business financing and in residential financing in the pre-QM era of the early 2000s, but are now pretty much nonexistent for DSCR Loans. This change has been instrumental in “de-risking” loans for smaller real estate investors, many of which ran into trouble in the prior era by taking on loans with exotic floating rate structures they didn’t understand well and were burnt by rapid fluctuations that led to bankruptcies or other credit trouble. While not offering a floating rate option for DSCR Loans takes away some tools for investors, it provides large benefits in making the loan product durable and sustainable with conservative rate structures and offers a larger group of potential real estate investors to access much needed capital to build wealth.
For advanced borrowers however, a Hybrid (Fixed to ARM) option has emerged as a potential choice. This option combines fixed and floating rate structures to balance protections against rate spikes with the ability to take on some additional floating rate risk to achieve more optimized loan terms. This structure is a “hybrid” where the loan starts out with a fixed rate for several of the first years of the term, then switches to a floating structure (albeit with some limits) after a certain milestone, typically after five or seven years of payments are made. The date where the loan changes from fixed rate to floating rate is usually lined up with the prepayment penalty period duration, so that the fixed rate period is the same as the period there would be fees due with an early prepayment. This is helpful for borrowers so that if rates move higher during the fixed-rate period of the loan term, and the loan’s interest rate increases when the floating rate period begins, they are able to refinance the property without worrying about any prepayment penalty fees.
Hybrid (Fixed to ARM) loan structures unfortunately are usually expressed by lenders (and even loan officers or licensed mortgage brokers) in confusing fashion. Many regrettably don’t have a great understanding of these more advanced financial debt concepts themselves! This can lead to poor outcomes where borrowers are misinformed on the structure, or never hear about this option in the first place. Luckily, this section will go through each provision and what they mean step by step below, so you can be a well-armed borrower understanding exactly how these Hybrid loan structures work!
DSCR Loans that have a Hybrid (Fixed to ARM) structure are typically expressed in shorthand as two numbers separated by a slash mark – such as “5/6 ARM” or “7/1 ARM.” One important thing to remember and understand is that these are still 30-year Loan Terms even though the number “30” isn’t typically referenced in this representation or when lending professionals talk about these in shorthand. The first number represents the initial years of the term (again, still always at least 30 years) when the rate is fixed, while the second number refers to the frequency of rate adjustments after the fixed rate period. If that’s not confusing enough, the second number can refer to either years or months, depending on the context! Generally, if you see a “6” as in the “5/6 ARM” example, that means after the first five years of the term, the interest rate “floats” every six months. But if you see a “1” like in the “7/1 ARM” example, the interest rate floats every one year. Confusing or poorly structured “industry-standard” terminology and shorthand like this is another reason it’s of utmost importance to make sure you really understand and verify the nuances of the loan rate structure!
Q: What is a 5/6 ARM DSCR loan?
A: A 5/6 ARM DSCR loan is an adjustable-rate mortgage where the interest rate is fixed for the first 5 years, then adjusts every 6 months based on an index. These are commonly offered by DSCR Lenders to provide lower initial rates than 30-year fixed options. After the fixed period, your rate (and payment) may rise or fall depending on market rates and loan terms.
There are several additional important provisions of Hybrid (Fixed to ARM) DSCR Loan structures beyond the floating rate period and the floating rate frequency. The next important concept to understand is how exactly the interest rate is calculated once it enters its floating period. The interest rate during the floating rate portion of the term is calculated as Margin + Floating Rate Index. The Margin represents a fixed percentage that is set for the life of the floating rate period. Without diving too deep into heavy real estate finance topics, this amount will generally be equivalent to a risk premium between general DSCR Loans and so-called “risk-free” Treasury bonds. In 2026, the typical “margin” for Hybrid (Fixed to ARM) DSCR Loans is generally between 4-6%.
The Floating Rate Index is an index number representing the rate banks can earn from borrowing short-term (overnight), similar to the Federal Reserve funding rate. In 2025, with the phase-out of LIBOR generally completed, most DSCR Loans have a Floating Rate Index equal to the SOFR (Secured Overnight Financing Rate). To compute the floating rate on a DSCR Loan that has a Hybrid (Fixed to ARM) structure and has entered into its floating rate period, you simply add the two numbers together. For example, if the Margin is 4% and the SOFR on the Interest Rate Change Date (typically a date set in the loan documents that occurs every six or twelve payment dates) is 3.31% rate, the new rate is 7.31% (4% + 3.31%). However, it is not quite as simple as this (told you understanding this structure was complicated!) as there are additional provisions that also come into play when determining the floating rate.
For Hybrid (Fixed to ARM) DSCR Loans that enter a floating rate period, there are limits to how high and how low the interest rate can go. Here are some additional provisions that are included on these types of rate structures:
The interest rate when the loan is in its floating period is equal to the sum of the margin and floating rate index, however there is a limit or “ceiling” to how high the rate can go. Typically, DSCR Loans under this structure have floating rate ceilings that are of 5-6 percent higher than the initial interest rate. Take for example a Hybrid (Fixed to ARM) DSCR Loan with an initial interest rate of 7% and a ceiling six percent higher than initial rate, a typical ceiling structure. In this example, the interest rate during the entire term of the loan would never be able to exceed 13% (a ceiling of 13% is calculated by adding the initial rate of 7% and 6%) even if the sum of the margin and floating rate index was higher than that. To further illustrate, if in this example, with a same margin of 6%, but if the floating rate index was at 8%, the interest rate on the loan would still be only 13%, not 14% (or the current sum of margin and index; 6+8%), since the loan has a rate “ceiling” of 13%. This ceiling structure helps provide certainty for borrowers so that even if rates increase significantly, there is a limit to how high the monthly payment on the loan will ever go.
The interest rate floor is similar to the ceiling, but the reverse. The floor is a percentage that the rate can never go below (in contrast to the ceiling, which is a percentage that the rate can never go above). Typically, on DSCR Loans that have the Hybrid (Fixed to ARM) structure, the floor will be equivalent to the initial fixed interest rate, so even if market rates decrease by the time the floating rate period kicks in, the rate will never go below the initially charged rate.
This number represents the maximum percentage the interest rate can change in an instance of a change in floating rate (typically every six or twelve months once the initial fixed rate period finishes). For DSCR Loans with a Hybrid (Fixed to ARM) structure, the floating rate periodic adjustment cap is typically 1%. This generally means that in case the floating rate index amount changes by more than 1% between floating rate change dates, it will be limited at just a 1% change regardless.
For example, if there is a DSCR Loan that is in a floating rate period that floats annually, with a margin of 5% and floating rate periodic adjustment cap of 1%, then if the floating rate index changes from 3% on one floating rate adjustment date to 4.5% on the next one, the interest rate will change from 8% (5% margin + 3% index) to 9%, not 9.5% (5% margin + 4.5% index) because the interest rate can only change by a maximum of 1% per period.
The final provision to understand for Hybrid (Fixed to ARM) DSCR Loans is the maximum initial adjustment cap, meaning the maximum the interest rate can change in the specific date when the loan changes from the fixed rate period to the floating rate period (this occurs only one time during the term of the loan). Typically, it is also set to 1% for DSCR Loans with the Hybrid (Fixed to ARM) structure. The intention behind this cap is to prevent initial rate “spikes” that catch borrowers off guard when the fixed rate period ends. This provision is likely a response to some of the poorly constructed and arguably predatory loans during the pre-QM era in which borrowers faced very large spikes (sometimes 5-10% even) that they weren’t prepared for and didn’t fully understand were coming. The floating rate max initial adjustment caps that are a feature of Hybrid (Fixed to ARM) DSCR Loans provide another layer of protection towards borrowers to prevent volatility and downside rate shocks.
There are a lot of terms and concepts to understand when it comes to DSCR Loans with the Hybrid (Fixed to ARM) structure, however, getting a rock-solid understanding before committing to this option is worthwhile. Additionally, while there are a lot of concepts to remember and numbers to crunch, it all falls under the same theme of making these loans less risky and volatile (protections against spikes and frequent changes) that caused so many problems leading up to the 2008 financial crisis. For sophisticated borrowers determined to get the best rates and terms possible for all of their rental property deals, it’s absolutely worth comparing how a Hybrid (Fixed to ARM) DSCR Loan option looks compared to fixed rate alternatives. It’s always smart to run the numbers when it comes to real estate investing!
Q: Are DSCR loan interest rates fixed or adjustable?
A: The vast majority of DSCR Loans are fixed-rate for 30-year terms, however a small portion (likely around 10%) have the Hybrid (Fixed to ARM) structure which combines fixed and floating rate periods. No DSCR Loans are purely floating-rate for the entire term.
Up Next, check our Key Financial Metrics for DSCR Loans that DSCR Lenders utilize to underwrite loan files and evaluate deals.
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