When it comes to investing in real estate, it’s undoubtedly a potential money maker. However, it’s essential to not just understand but rather master navigating through the mortgage world associated with investment properties. The interest rates that you will find attached to loans for these properties are, more often than not, going to be higher than the interest rates attached to a mortgage for a primary residence. Conversely, securing a mortgage for an investment property is going to involve a stricter qualification process. Given the nature of the interest rates and the qualification process, can you imagine the serious profit punch that will land under your belt if you do your top-tier homework through both processes?
The interest rates on mortgages for investment properties are usually not as low as those for primary residences. Loaning money for an investment carries more risk than loaning it for a typical primary residence. That’s why lenders charge more in interest. And they should, too: Most investment properties are rented out, and the percentage of renters who default on their leases is higher than the percentage of homeowners who default on loans attached to their own homes.
Many things go into determining the mortgage rate for an investment property, and one of the most important is your credit score. If your credit score is high, then you can expect to receive a lower interest rate, and in the long run, that can save you tens of thousands of dollars. If your credit score is not so great, or if it’s good but could be better, then you have some work to do. You don’t just have to take our word for it when we say that your credit score matters—just ask any lender.
How much you put down influences what interest rate you get on your mortgage. This is doubly true for investment properties. Sound like a broken record yet? That’s not us trying to make an extra point. It’s just that the reality of the situation is this: A higher down payment makes it less likely you’ll default on the mortgage when times are tough, and that’s why lenders offer lower interest rates, insurance costs, and certain other mortgage terms for mortgages where the buyer has put more money down.
The kinds of loans and the lengths of time offered to pay off those loans also matter. Mortgages with fixed interest rates make it easier to plan for the long term since you don’t have to worry about payment changes. If interest rates rise, your payments won’t. On the other hand, ARMs, which have lower starting interest rates, can save money if you know you won’t be in the home for the long term.
Rates are also influenced by the number of units in an investment property. Loans on multifamily dwellings typically have higher interest rates compared with those for single-family homes. Nine times out of ten, a similar property in a desirable rental location will command better terms than a similar property in a less desirable location.
Another crucial element is your debt-to-income (DTI) ratio. When determining your creditworthiness and ability to make monthly payments, lenders look not just at your income but at your existing level of debt. Reducing that debt is critical in two key ways: first, it increases your cash flow, which can help you make the new payments; second, it improves your credit, which can lower your interest costs, not to mention potential down-payment requirements. And while the simple way to do that is to trim your budget and “live within your means,” there are some things you can do to manage your DTI even better.
When it comes to finding the best deals on mortgages for investment properties, try these approaches. To start, comparison shopping is key. Remember that each lender is unique, with its own criteria for deciding who gets the favorable rates. Then, if you’re still in the dark about what offers are out there or can’t make heads or tails of the absurd number of mortgage products and lenders, consider working with a mortgage broker to give you a hand. That, at least, is the advice you can find on a certain popular millennial-targeted website, where a “rates and fees” sidebar exists in most content pieces just like this one.
It’s incredibly important that you work hard to maintain a secure financial base. You should have a good credit score, save enough money for a large down payment, and always consider your debt-to-income ratio. All of these factors are instrumental when it comes to obtaining favorable mortgage rates. In fact, if you fall short on any one of these, you could find yourself paying significantly more for a house than you would have otherwise, and it could also make it much more difficult (or even impossible) for you to get a mortgage at all.
It can be very beneficial to investors to understand the ins and outs of the loan programs available specifically for investment properties. Some lenders can offer programs that have been tailored to fit the needs of the real estate investor; with competitive rates and terms to match. By doing the necessary research into the world of investment property lending, real estate investors can put themselves in a better position to secure favorable mortgage rates and terms.
To sum up, lenders view investment properties as riskier propositions than they do owner-occupied homes. And what do lenders do when they see more risk? They charge more for it. So, right from the start, when you’re shopping for a mortgage on an investment property, you should expect to see a higher interest rate than what’s being offered on the types of mortgages that people use to buy homes they live in.
What will dictate the exact interest rate you’re offered? That’s mostly going to come down to your strength as a borrower and the strength of the deal you’re trying to put together.
