In the world of mortgage rates for investment property, so much can change in a relatively short amount of time. This has been happening more frequently in the past months amid the COVID-19 outbreak in the US. Because of the pandemic, investment property mortgage rate predictions for 2020 made months ago by experts didn’t come to pass. With everything that has been going on and as we watch the situation unfold in the US housing market, experts now have new mortgage rate predictions for 2020 and the post-coronavirus market. So, will rental property mortgage rates continue dropping? In order to clearly understand the effect of the coronavirus on mortgage rates and the industry as a whole, it’s imperative to look at the economy and housing market context.
US Housing Market 2020 – 2021
Recent data from Realtor.com shows that the US housing market 2020 is getting back to the more normal pace of growth levels which we saw in January before the coronavirus pandemic. Demand from buyers was the first to recover in early May. This was then followed by a house price growth recovery in early June. Currently, the pace of home sales has also caught up to pre-COVID levels. While growth in supply is still below normal seasonal pace, it continues to improve as buyers await for more sellers to put new homes on the market. Moreover, buyer’s confidence appears to have fully recovered too, mainly due to lower mortgage rates.
Current Investment Property Mortgage Rates
Even before the COVID-19 pandemic, investment property mortgage rates in 2020 were forecast to be lower than they were in 2019. The pandemic and the aftermath only resulted in rates falling lower than initially expected. The Fed responded to COVID-19 by cutting the Federal Funds rate to 0% interest rate and purchasing billions of dollars of mortgage-backed securities. These actions have increased the supply of money and liquidity in the US economy. Consequently, this led mortgage rates to decrease. Based on a NerdWallet survey of mortgage rates as reported by national lenders, these are the average mortgage rates as of this writing (August 5th, 2020)
- The average 30-year fixed mortgage rate fell three basis points to 3.00%
- The average 15-year fixed mortgage rate dropped three basis points to 2.61%
- The average 5/1 ARM rate dropped one basis point to 2.86%
Will Mortgage Rates Continue Dropping?
This is the main question that buyers and real estate investors want the answer to. Leading housing experts agree that mortgage interest rates will continue to be low in the second half of 2020 and moving forward into 2021. According to Freddie Mac, rates are still hovering close to record lows, pushing demand up (20% more than the same time last year). If they’re current, the average 30-year investment property mortgage rate could break records and fall below 3%. This will make for a strong purchase and refinance environment throughout the year.
But you might be wondering why exactly are mortgage rates are dropping so low? One of the reasons is the tighter lending standards. Mortgage lenders are concerned with the severity and the duration of what’s going on. With a record increase in unemployment claims, mortgage delinquencies and missing rental payments are likely to rise. Thus, lenders fear that they’ll take in less money, whether it’s because of defaults on existing and future loans or mortgage relief programs that allow borrowers to delay payments for up to a year.
This can be seen in the data, specifically the Mortgage Bankers Association’s Mortgage Credit Availability Index (MCAI). This index measures how accessible loans are to borrowers. If the MCAI drops, this means that lending standards are becoming more strict; if the index rises, this points to looser credit. Data shows that the latest index has fallen a sharp 3.3% to 125 in June of 2020. Meaning, while lower rates motivate people to buy real estate, not anyone will be able to get a mortgage loan due to strict standards.
Will Lowe Rates Benefit the Housing Market?
The idea behind lower investment property mortgage interest rates is to help get the US economy moving again. Lower interest rates encourage financial activity as they convince people to either buy refinance now versus later. Once the coronavirus impact lessens and major cities restart their economies, real estate will become more attractive again. According to some experts, this will lead buyers to look for new homes for sale, and lower rates will help them afford larger homes. This could present a great opportunity for people to save money while shopping for their dream home during the second half of 2020.
Nonetheless, some experts have different opinions. They believe the low investment property mortgage rates today and resulting affordability might not be enough to support the real estate market. This is because of record unemployment and especially in markets that still suffer from a smaller supply of houses on the market to choose from. Plus, tighter lending standards will block more people from taking advantage of extremely low mortgage rates, as already mentioned. As you can see, there’s still uncertainty when it comes to housing market predictions for late 2020 and 2021.
However, one thing’s for sure is that lower mortgage rates are definitely in favor of real estate investors in 2020. If you’re planning on getting a mortgage for rental property, now is a great time to make your move. Again, most experts say that mortgage rates for late 2020 and going forward into 2021 will stay at their current lows. And because the demand for loans is decreasing, lenders are more willing to lend to investors – those who meet their standards and are creditworthy, of course. But, there’s one question left to answer…
How Much Higher Are Mortgage Rates for Investment Property?
Investment property mortgage rates are always higher than rates on primary residences (owner-occupied homes). This is because financing agencies usually have a separate set of fees for primary residence and for investment properties. These fees are directly correlated with your mortgage rate. Usually, when getting investment loans, investors pay higher fees and, therefore, get higher rates. How much higher? Technically, it depends on the type of investment property, your credit-worthiness, and your down payment. However, the rule of thumb is that rental property mortgage rates are 0.5% to 0.75% higher than primary mortgage rates. So, at current rates mentioned above:
- 30-year investment property mortgage rates would range from 3.5% – 3.75% for single-family homes
- 15-year investment property mortgage rates would range from 3.11% – 3.36% for single-family homes
- 5-year adjustable-rate mortgage (ARM) would range from 3.36% – 3.61% for single-family homes
Despite the fact that they’re higher, these rates are still much lower for investors than in previous years. Also, there are some basic down payment requirements of investment property loans. Fixed and adjustable rates for a single-family home require 15% down. As for fixed and adjustable rates for multi-family homes (2-4 units), they require 25% down. How much you put down on the rental property affects what mortgage rate you’ll get. And obviously, the higher your credit score, the better. A higher credit score combined with a larger down payment will give real estate investors a better chance at low mortgage interest rates for investment property.
Read this guide to learn all about the Best Real Estate Investment Loans in 2020.
Should You Consider Rate Locking Now or Wait?
Mortgage rate locking is an agreement with the lender that allows you to lock in the interest rate for a specified time period at the market rate. The main benefit of rate locking is that it protects you from market fluctuations during the lock period. Whether or not and when to lock in a mortgage rate depends on your own circumstances. It also has to do with your tolerance for risk as a real estate investor. If you lock in now, there’s always the possibility that rates will drop lower. But if you wait too long, rates could unexpectedly go up.
That’s why many market experts recommend not trying to time the market when deciding on rate locking. Instead, if you’re in a good financial position with prospects of continued employment, you should take advantage of mortgage rates for investment property today while they’re at their lowest. That’s especially true for those who want to refinance a rental property. But, don’t forget to ask your mortgage lender to run the numbers to better understand if the costs to refinance are worth the amount you’ll save.
Final Words for Real Estate Investors
You must realize that current mortgage rates affect your real estate investments. The best way to understand how is by running a rental property analysis in which you see how different rates affect your expenses, cash on cash return, and ROI. Mashvisor’s Rental Property Calculator makes this easier. All you need to do is enter basic financing information (loan type, loan term, interest rate, and down payment), and the tool will do the rest of the work. You’ll get a readily-calculated analysis that includes accurate data and projections of your returns. Moreover, you can keep changing the numbers until you find the best investment property mortgage rates for you.