Investing in property is a great way to build long-term wealth, but you will need to get the best mortgage rate for investment property.
As a real estate investor, one of the things you should be on the lookout for when looking for the best investment property is mortgage rates. However, mortgage rates vary depending on several factors. The key to getting the most out of your investment is finding the best mortgage rates available to you in the area of your choice.
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Not everyone who goes into real estate investing is capable of buying a property in an all-cash transaction. A huge chunk of investors in the country usually apply for mortgages to buy investment properties.
In this blog post, we’ll explore the best tips for finding and securing the best mortgage rate for investment property, so you can get the most out of your investment. We will also show you how you can use an investment property platform like Mashvisor to find the best rental properties that will help you achieve your investment goals.
Mortgage Rate for Investment Property vs Mortgage Rate for Primary Residence
A wise investor knows the importance of shopping around for the best mortgage rate for investment property before buying it.
For each mortgage application, you will be asked to answer the question of how you intend to use the property you are about to purchase. Generally, you will be given a choice of using it as a primary residence, a second home, or an investment property. In this section, we will focus on mortgage rates for a primary residence and an investment property.
Mortgage Rates for Investment Properties
Mortgage rates are different for investment properties and primary residences. Of the two, the mortgage rates for an investment property tend to be higher than those for a primary residence. It is because of the additional risks associated with investment properties.
Mortgage lenders are more likely to incur losses if the mortgage holder defaults on their loan due to a change in the value of the property or its rental income. Therefore, lenders often require a higher mortgage rate for investment property as they seek to offset the potential risks associated with giving out such loans.
As a general rule, mortgage rates for investment properties are usually 0.50% to 0.75% higher than mortgage rates for primary residences. So, make sure to check with multiple lenders to get the best rate available in your area of choice.
Lenders add the surcharge because borrowers who own both a primary residence and investment property tend to bail on the latter when things get rough.
Additionally, mortgage lenders may also require larger down payments and other conditions while setting mortgage rates for investment properties, making them more expensive compared to mortgage rates for primary residences.
Mortgage Rates for Primary Residences
Primary residences, on the other hand, aren’t as high risk as investment properties since they are where you hang your hat at night and call your home. Typically, you will get the best rates possible on primary residences when taking a loan.
A property qualifies as a primary residence if:
- It is a place where you reside for a bigger part of the year
- It is the legal address you use for your official documents, forms, and tax returns
As mentioned earlier, homebuyers tend to obtain better mortgage rates on primary residences because they are more likely to keep them when times get tough.
Generally, when an investor faces difficult times, like a financial or economic crisis of sorts, chances are they will most likely give up the investment property. While an investment property can be a good income source, most investors would rather keep a roof over their heads than pay for the mortgages and upkeep of another property.
It’s all about setting your priorities straight. Thus, lenders find primary residences a somewhat secure option compared to rental and other investment property types.
Between primary residences and investment properties, the latter is often a good idea, even if lenders charge higher rates for them.
What Affects the Mortgage Rate for Investment Property?
It is important to calculate your return on investment when comparing mortgage rates to decide if an investment property is worth pursuing. Generally, mortgage rates for investment properties are higher than mortgage rates for primary residences, and the difference can vary depending on your credit score and down payment.
A good credit history and a larger down payment will help you qualify for better mortgage rates on investment properties. It’s important to speak with a mortgage specialist to get an idea of mortgage rates for investment properties in your area, as the rates can vary significantly from one region to another.
Ultimately, it’s about balancing the mortgage rate against potential returns on investment to decide if the venture is worth taking on.
6 Key Factors That Affect Investment Property Mortgages
Let’s take a quick look at some of the factors that affect investment property mortgage rates:
1. Credit Score
Lenders nowadays don’t want a repeat of the last housing market crash. They now hold higher standards when it comes to an applicant’s credit score. The higher your credit score, the more likely you are to get the best mortgage rate for investment property.
2. Down Payment
Your monthly mortgage payments will depend largely on how big a down payment you can make on the investment property of your choice. The bigger the down payment, the smaller the monthly mortgage payment you need to make.
3. Debt-to-Income Ratio
Lenders also take a look at your ability to make monthly payments. For this reason, they factor in your debt-to-income ratio or DTI. Your DTI is basically just a summary of your monthly debt payments divided by your gross monthly income.
4. Loan-to-Value Ratio
The loan-to-value ratio, or LTV, is a metric used by lenders to compare the amount of your mortgage versus the appraised value of the investment property. And just like your monthly payments, the amount of your down payment will significantly impact your LTV.
5. Regional Rates
Mortgage rates are also affected by the different regional rates. As mentioned earlier, the rates vary from one area to another. That’s why it’s very important to perform due diligence so you can get the most optimal return on your investment, even if you must take out a loan to get it.
6. Inflation
We’re all quite aware of how inflation rates have gone up this past year. Because of that, the Federal Reserve has taken an aggressive stance to combat it by increasing interest rates to minimize consumer borrowing. Unfortunately, mortgage rates are also affected by these spikes, so you need to give plenty of thought before signing up for a mortgage.
4 Tips to Get the Best Mortgage Rate for Investment Property
If you want to get the best rates when you apply for a mortgage, you need to keep the following in mind:
1. Make a Bigger Down Payment
A bigger down payment gives you lower monthly payments on your mortgage. A huge chunk of the cost goes away when you make a down payment of at least 20% on an investment property.
2. Bring Your Credit Score Up
Your credit score will determine how much your interest rate will be. If lenders see that you have a stellar credit score, you are most likely going to be given the best mortgage rates on your property purchase.
3. Lower Your Existing Debt
If you lower your DTI, you are showing lenders that you have enough room in your budget to make the monthly mortgage payments and other costs associated with owning a property. They include expenses such as property taxes, homeowner’s insurance, and other property management costs.
4. Exhaust Your Options
A wise investor knows that they can save thousands of dollars over the life of a loan by shopping around for the best possible mortgage deals. It might seem like not that big of a deal, but many homeowners and investors spend way too much because they skip this part.
As a real estate investor, your goal is to make as much money as you can on a property, whether it’s through the rental income or the savings you make on your expenses. Think about it, a lower interest rate will significantly increase your gross rental income. So make sure to look for at least a handful of options before making a final decision.
How to Find a Profitable Investment Property
Now that you know how to find the best mortgage rate for investment property, the next thing you should know is how to find the most profitable investment properties in any location.
You need to perform due diligence as a real estate investor. Aside from doing your research on the best possible mortgage deals, you also need to do your homework about the real estate market of your choice.
This is where investment property analysis comes into play. And while the conventional method may seem too much work and time-consuming, investing in real estate in a digital environment is a lot easier.
The Best Investment Property Platform
Real estate investing is made a lot easier today with real estate websites and online platforms. Mashvisor is one such platform with a high Trustpilot rating of 4.7 stars out of 5.
As an investment platform, Mashvisor helps investors find the right income properties for sale that can help them achieve their investment goals. Investors who subscribe to Mashvisor’s services are given access to the following tools:
- A large database of the US housing market that covers nearly all regions in the country
- A Property Search tool that lets them find investment properties in any location in the US
- A real estate heatmap that lets them customize their search according to their needs
- An investment property calculator that gives them accurate and realistic ROI projections using actual data from real estate comps
If you’re someone who’s looking to make a big investment this year or next, you will want to have a website like Mashvisor on your side.
Get started with Mashvisor today.
Mashvisor’s real estate heatmap allows you to customize your investment property search according to your needs and preferences.
Wrapping It Up
Even with the high inflation rates we’re seeing now, it is still possible for you to find the best mortgage rate for investment property in any area of your choice. You simply need to do your homework. There’s nothing that can replace what due diligence can do for you.
As an investor, you must put in the work if you want to get the most out of your hard-earned money. Using Mashvisor is a good way to ensure you get more bang for your buck.
Mashvisor offers you access to the most accurate real estate market data, as well as the tools to make finding and analyzing real estate properties faster and easier.