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Understanding Investment Property Mortgage Rates

An investment property can be a huge addition to your personal profile and generate a great income when done right, but to have the ultimate success, you have to choose the right properties and secure them with the right financing. Whether you turn to a traditional bank for your real estate investment property loan, or you go the route of a private investor, it’s integral to go into it with knowledge about the real estate market and investment property mortgage rates.

investment property mortage rates

Investment Property Mortgages Vs. Owner-Occupied Mortgages

Before you can make sure that your investment property mortgage is a good deal, you need to understand the basic differences between an investment property mortgage and an owner-occupied mortgage. With both types of mortgages, 30-year financing is the most popular option, although 10, 15, 20, and 25-year mortgages are also available if you have the funds available to take advantage of a shorter mortgage.

Owner-Occupied Mortgages

Banks provide a lower interest rate on owner-occupied mortgages because they understand that you’re not using the home as a way to make money, you’re just trying to provide a home for yourself or your family. Because of this, the interest rates and down payments are manageable amounts to make them accessible for the average person.

Investment Property Mortgages

Lenders understand that you are making money off your investment properties and not just using them as a personal home. Of course, as with any investment, there’s a risk to purchasing multiple properties. If you don’t have the money to purchase the property in cash, lenders are going to have higher interest rates on these properties so they can make money off the risk of them as well.

Fortunately, renters expect to pay more per month for their rent than a homeowner would pay monthly for their mortgage payment. They understand that the additional output goes into the upkeep of the property and helps to off-set that they haven’t had to wrap up their money in the purchasing of the property itself. Because of this, an investment property can still be lucrative, even if the investment property mortgage rates are higher in the first place.

investment property mortage rates

Why Interest Rates for an Investment Property are Often Higher

On average, investment property interest rates can be between 0.50 and 0.75 percent higher than you’d see for a traditional owner-occupied mortgage. This extra percentage is put in place to help the lenders off-set the additional risk of investment properties. At the end of the day, if you default on an investment mortgage, you’re not going to be put out of your home, you’re simply going to lose an investment property.

Why Investment Properties Often Require A Larger Down Payment

That same added risk factor goes into the reasoning behind lenders asking for a higher down payment for investment properties. Most owner-occupied properties require the purchaser to put 10% down. Investment properties, on the other hand, typically require a 15% down payment. Often, the larger the down payment, the lower the interest rate you can get on the loan. The more units included in your investment property, the higher the down payment that will be required.

Preparing Your Finances for an Investment Property Loan

In order to get the best possible rates for your investment property mortgage, make sure you have your finances in the best shape process prior to applying for the loan. Having a credit score of 700 or higher will help you secure the lowest interest rates possible. It’s also a good idea to have between 15% and 20% of the property price available in cash for your down payment.

Additional Factors to Consider

Both the interest rates and the down payments for your new mortgage property can also vary based on what type of loan you’re securing. Conventional bank loans, government-backed loans, private investor loans, and commercial loans can each have their own parameters. If you struggle to secure a traditional bank loan, try for a private investor loan instead.

Understanding the down payment and the interest rates of your investment property loan will help you determine what size mortgage you can really afford.  Getting the lowest payment possible for your investment property is easier, however, when you have your finances in great order before you start shopping around. Don’t snatch up the first offer you’re given. Any lender will feel more comfortable with your investment if you’ve acted as a landlord successfully in the past.

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