When the real estate investor decides to purchase a property for any type of reason like making money, he/she needs to know that there are certain rental property mortgage rates that apply for every specific type of real estate. However, it is hard to understand what the best mortgage rate is for you as an investor? Where you take your mortgage from – the local banks or national banks -plays an important role. This is due to the fact that these banks select the down payment and the interest rate. Both factors will certainly have an effect on your budget and finance plan.
When financing rental property, you might be charged various rental property mortgage rates, depending on numerous factors.
Are you about to buy investment property? Are you interested in understanding all the factors that have weight on the rental property mortgage rates? Keep reading because this blog presents all the information you need at one place.
#1 What Are the Reasons for Financing Rental Property?
If your future plan is making money in the real estate business, you probably consider buying rental properties. What are the rental properties and how do you get rental income? A rental property is basically a property from which the landlord receives money. The money comes usually monthly from the tenants occupying the space. The latter is also known as rental income. There are two types of rental properties – commercial and residential. Depending on the size of the place, the year build, etc., the landlord will receive different rental income. The more the investor is investing in real estate, the bigger rental income he/she will receive.
Related: Making Money in Real Estate: Beginner-Level Investments
#2 Local Banks vs. National Banks
Sure enough, buying rental properties is not cheap, and most real estate investors simply cannot afford paying huge amounts of money at a time. Consequently, investors turn to banks for mortgage loans. Typically, you may choose between two types of banks: local banks and national banks. Both have pros and cons in regards to the down payment and the interest rate as well as the rental property mortgage rates. On one hand, local banks are smaller in comparison to national banks. This means that such local banks have a major advantage over the big national ones. Due to the smaller operation scale, local banks may provide you with personal attention, and, thus, help you with any issue or problem you face. For instance, local banks are more likely to explain what the advantages and disadvantages of investing in real estate for the sole purpose of making money are. Moreover, local banks are more likely to offer a lower down payment, which is a huge benefit for smaller real estate investors. Hence, this helps them to start financing rental property as a part of their real estate investment business. On the other hand, national banks have very attractive benefits to their clients. In addition, national banks usually offer to their clients 24/7 service. This is very handy if you have a question on Saturday morning, for instance. However, usually the interest rate is higher, due to the fact that national banks are purely about making money. Further, you may not only receive a higher interest rate but also lack of personal assistance. The latter is because of the huge number of clients they have.
#3 Return on Investment and Rental Property Mortgage Rates
Return on investment (ROI) is used to determine the level of profitability of an expenditure, for instance, when you buy investment property. Determining return on investment is useful for removing the guesswork from your business decisions. In other words, when calculating ROI, you, as a real estate investor, can have a better understanding of the total growth of your investment. ROI is the division of the gain of the investment minus the cost of the investment by the cost of the investment. The higher the mortgage rate, the higher the cost, thus, the lower the return on investment. Therefore, the mortgage rate plays an important role in the success of your rental property.
Related: Calculating the Rate of Return on Investment Properties: Step by Step
#4 Types of Rental Property Mortgage Rates
As previously described, when buying rental properties, real estate investors typically need to take a mortgage loan and, hence, face the rental property mortgage rates. It is necessary to mention that there are various names for rental property mortgage rates. Many consumers and real estate agents name them that way. However, loan lenders may use the term “non-owner occupied mortgage rates”. The latter is due to the fact that the lender supporting you when investing in real estate categorizes the loan, depending on the type of occupation of the future rental property. There are three types of occupation and, thus, three kinds of rental property mortgage rates that apply to each type:
This type of residence is your primary residence. When you take a mortgage for that specific type of residence, it is necessary to move in to your new home within the first 60 days. Additionally, the requirement is to live there for a minimum of one year. After particular time has passed, you are allowed to rent it to your future tenants without being afraid that your mortgage contract will change, and you will be charged extra.
This type of residence is considered as your second home. For instance, it might be your summer house on the beach or maybe winter home somewhere in the mountain. However, mortgage lenders strictly prohibit renting it out. Additionally, if lenders find out that the place with a second-home type of mortgage is being rented out, the real estate investor might be called out to pay the house price all at once.
Non-owner occupied mortgages
When a real estate investor decides to buy investment property as non-owner occupied, this usually means that the purpose of the place is renting it out to tenants. However, if the landlord decides that he/she wants to live there and make it as a owner-occupied home, he/she is able to do it any time.
Related: All You Need to Know About a Mortgage for Rental Property
#5 Rental Property Mortgage Rates
When the owner is financing rental property, in most cases the rental property mortgage rates as well as the down payment are higher on non-owner occupied premises than on home ones. This is due to the fact that lenders categorize it riskier to support such properties in comparison to owner occupied premises. First of all, some tenants tend to care less about the look of the place that they rent. This results in a bigger chance of losing the initial value of the property. Another reason is that such homes may be vacant for periods of time. The latter might result is the inability of the landlord to pay the mortgage fees on time.
If you are willing to learn more useful information related to rental property mortgage rates or other interesting real estate investing topics, head on to Mashvisor!