Mortgage Q&A: “Are mortgage rates higher for investment properties?”
So you’ve decided to purchase an investment property to make a little extra cash on the side. Perhaps you think now is the time to lock in a low mortgage rate and snag a foreclosed property at a discount.
Well, before you make your move, know that mortgages rates tend to be much higher for investment properties.
On top of that, qualifying for a mortgage on a rental property can be a lot more difficult as well.
Gone are the days of 100% financing on investment properties folks – and who knows if they’ll ever return. Instead, you might be looking at a minimum down payment of 15-25%.
So not only will you end with a higher mortgage rate, but you’ll also have to bring more money to the table for your down payment, as loan-to-value ratios are typically much more restricted.
The upside is that larger down payments tend to bring down mortgage rates, but you’ll still pay a premium if it’s an investment property as opposed to a second home or owner-occupied property.
How much higher are mortgage rates on investment properties?
It’s difficult to say your rate will be “X percent higher” because there are so many different variables and a large number of issuing banks with different risk appetites, but you could easily pay a percentage point or two higher.
For example, 7% vs. 5% on a 30-year fixed mortgage, which is certainly significant, especially if we’re talking about an expensive rental property, such as a 4-unit property.
If your investment property is 3-4 units, as opposed to 1-2, expect another pricing adjustment.
If it’s also a condo, watch your rate climb even higher.
Tip: You may be able to snag a discounted rate if you go with a 15-year fixed vs. a 30-year fixed. But obviously the monthly payments will be higher as a result.
Why are mortgage rates higher on investment properties?
While it might seem unfair to pay more to finance an investment property, banks and mortgage lenders see investors as riskier borrowers than homeowners.
After all, if you live in your home, there’s less of a chance you’ll walk away if things go south. There’s probably a better chance you’d ditch your investments before your primary residence. It is, after all, providing much needed shelter.
And if you occupy it, there’s a better chance you’ll maintain it properly and keep it in good shape. Pride of ownership and all that.
Most investors are also homeowners, so if they had to choose, they’d probably pay their own home’s mortgage first…and not displace their entire family.
This isn’t just opinion either. A ton of speculators ditched their properties during the housing crisis in the early 2000s after home prices plummeted. Most didn’t have any skin in the game, aka a down payment, so it was easy to just stop paying the mortgage, even if it’s destroyed their credit.
There’s a good chance these same investment property owners held onto their primary residences and weathered the storm.
Anyway, this price disparity explains why many investors pay with cash or commit occupancy fraud to obtain lower mortgage rates.
A common tactic is telling the lender they plan to occupy the investment property as their primary residence and then quickly renting it out after obtaining more favorable financing. Aside from being wrong, it’s a risky game to play for some interest rate savings.
Read more: Are mortgage rates higher for condos?