This blog explains why DSCR loan rates don’t move with Fed rate cuts, and how investors should track the 5-Year Treasury instead.
When the Federal Reserve announces a rate cut, real estate investors naturally expect borrowing costs to fall. For DSCR borrowers, however, that expectation often leads to confusion and frustration.
Despite recent Fed action, DSCR loan pricing may not move at all. That’s not a delay or a disconnect. It’s because DSCR loans are not priced off the Fed’s overnight rate.
Understanding what does drive DSCR pricing can help investors time deals more effectively, underwrite more accurately, and avoid costly assumptions in a changing market.
The Fed Funds Rate vs. DSCR Pricing
The Federal Reserve controls the Fed Funds Rate, which influences overnight lending between banks. While this rate affects short-term liquidity and broader economic conditions, it is not the benchmark used to price DSCR loans.
DSCR loans are long-term, investor-focused products. Their pricing reflects how capital markets evaluate risk and duration – not short-term monetary policy moves.
That’s why a 25-basis-point Fed rate cut does not automatically translate into lower DSCR rates.
The Real Driver: The 5-Year Treasury
DSCR loans are typically indexed to the 5-Year U.S. Treasury, not the Fed Funds Rate and not the 30-Year Treasury.
At first glance, that may seem counterintuitive. DSCR loans are often structured as 30-year loans, so why does a 5-year benchmark matter?
The answer lies in investor behavior.
Although DSCR loans are written with long amortizations, they are rarely held for the full term. Investors refinance, sell, or reposition properties far sooner. Across the market, the average DSCR loan is paid off in roughly five years.
Capital markets price loans based on expected duration, not contractual length. Since DSCR loans prepay at a weighted-average five-year horizon, the 5-Year Treasury is the most accurate benchmark for pricing risk.
Why Markets Move Before the Fed Acts
Another key point many investors miss: DSCR pricing moves daily, not after Fed meetings.
Treasury yields respond instantly to economic data, inflation expectations, employment reports, and even speculation about future Fed policy. By the time the Fed formally announces a rate cut, markets have often priced it in weeks or months earlier.
In other words, if lower DSCR rates are coming, they will typically reflect changes in the 5-Year Treasury before any official Fed announcement.
Waiting on the Fed alone is not a strategy.
What This Means for Investors
For real estate investors relying on DSCR financing, the takeaway is simple but critical:
- Don’t assume Fed cuts = cheaper DSCR loans
- Watch the 5-Year Treasury, not headlines
- Underwrite deals based on current market pricing, not anticipated relief
This matters most in today’s environment, where pricing errors can quickly turn marginal deals into break-even or losing investments.
Investors who misjudge rate dynamics often:
- Overestimate cash flow
- Overpay on acquisitions
- Delay refinancing based on assumptions that never materialize
Why Discipline Matters More in This Cycle
Markets are softening, liquidity is tighter, and lenders are being more selective. In this environment, disciplined underwriting matters more than optimism.
Assuming rates will “come down soon” is not a substitute for sound deal fundamentals. Strong deals should work today, not only in a more favorable rate environment that may or may not arrive on schedule.
This is where experienced lenders add real value, not just by providing capital, but by helping investors pressure-test assumptions before they become problems.
The Bottom Line
Federal Reserve rate cuts make headlines, but they are not the lever that controls DSCR pricing.
The 5-Year Treasury is the benchmark that matters, and it reflects market expectations in real time, not on announcement days.
When investors understand this dynamic, they can:
- Time acquisitions wisely
- Structure financing strategically
- Avoid assumptions that erode profitability
Work with a Lender that Has Your Back
Dominion Financial offers DSCR loans built for serious real estate investors who value speed, flexibility, and certainty.
We offer up to 80% LTV, no tax return requirements, and a price-beat guarantee on DSCR loans: all backed by in-house underwriting. In a market where timing is everything, we help you stay one step ahead.
INVESTOR TAKEAWAYS
A Federal Reserve rate cut affects short-term overnight lending between banks, not long-term investment loans. DSCR loans are priced based on capital market risk and loan duration, so changes to the Fed Funds Rate do not directly impact DSCR pricing.
DSCR loan rates are primarily tied to the 5-Year U.S. Treasury yield. Capital markets price DSCR loans based on expected payoff timelines, and most DSCR loans refinance or pay off within about five years, making the 5-Year Treasury the most relevant benchmark.
Market’s price expectations in advance. Treasury yields respond daily to inflation data, employment reports, and economic outlooks, often weeks before the Fed takes formal action. By the time a rate cut is announced, DSCR pricing may already reflect it.
Investors should monitor the 5-Year Treasury yield rather than focusing on Fed headlines. Movements in this benchmark provide a clearer, real-time signal of where DSCR pricing is likely headed.
Investors should underwrite DSCR deals using current market rates, conservative assumptions, and realistic exit timelines. Strong deals should perform today, not rely on speculative future rate cuts to become viable.
