Mortgage Rates: The Real Estate Investor’s Complete Guide

Since you’ve clearly shown an interest in investing in real estate, you must be looking for new data on mortgage rates. 

Ambitions for investing can be diverse—it could be buying a house where you’ll spend your retirement, flipping a distressed home, or creating passive income as a landlord. And for all of the above, you need two things—financial stability and resources that’ll allow you to make this venture successful and profitable.

If we glance back at past experiences with banks, we can attest that investors and first-time homebuyers, in particular, have encountered numerous obstacles in obtaining funds. Luckily, today’s banking system offers more opportunities and benefits to those who want to invest in real estate. 

One of the significant changes that directly contributed to the growing interest in investing is the faster and more accurate calculation of interest rates and repayment terms.

To stay up-to-date and make an informed decision, continue with this guide dedicated to real estate investors who want to attain high profits and handle mortgage rates wisely.

To learn about different mortgage loan types and how to choose the best one for you, check out our video below:

Related: How to Invest in Real Estate in 2022: The Complete Guide for Beginners

Brief Introduction to Mortgage Rates

The first thing we should focus on here is the general information on mortgages.

Mortgage rates are essentially rates of interest that are distributed and added to mortgages. The lender determines these rates, and they can be either:

• Fixed
• Variable

Just as lenders are in charge of determining rates, mortgages won’t be the same for all the borrowers; ultimately, credit scores contribute the most. The rates could rise and fall, which directly impacts the market and investors’ strategy on how to invest in real estate.

How Do Mortgage Interest Rates Work?

With several different types of mortgages we have mentioned—which currently exist and are available to homebuyers and investors—the idea is the same: the lender funds your project up to some 80% of the property price.

Under this agreement, you, as the borrower, are obligated to repay a specific amount based on many factors.

You’re obviously expected to return the money given to you—but this amount depends on something called the amortization rate, which is further calculated. 

This amortization schedule determines the interest and principal for your repayment. And in essence, the longer the term on your mortgages, the longer it will take you to repay it in full. 

However, mortgages are not the only factor you should be informed about here. In addition to mortgages, you should inquire about tax rates, insurance, and other costs that a lender may include when making your purchase and closing the deal on your investment.

For example, the lender might require you to pay taxes and insurance on your new home at the previously established rates. That money goes to a separate account—which the lender takes care of.

It’s crucial to understand that these prices are not fixed and that there is a tendency for them to increase or decrease over time. Since the taxes and insurance rates that are added to this are not fixed (and can affect your mortgage rates), does the same apply to interest rates?

Yes. Current mortgage rates are subject to change in the open market. 

Although these changes are common, they are nothing like those we saw five years ago, when rates changed five times in just one day.

Why is this important?

As home buyers and investors in general, you should know that the lender will never charge you with yesterday’s mortgage rates.

Related: A Guide to Financing Airbnb Properties

Pre-mortgage Approval – A Necessity

Applying for a mortgage isn’t as straightforward as merely going to the bank. Investors and homebuyers must be granted pre-mortgage approval.

These approvals work to determine how qualified you are to buy a home and how much you can afford. This will ultimately help you get better terms on your loans.

The pre-mortgage approval document is valid for 90 days. Mortgage lenders take their time to review information regarding your income, credit score, and assets to make a decision.

Types of Mortgage Interest Rates

When applying for a mortgage, our humble advice is to gather information about the different types of interest rates and how they will affect your monthly repayments.

These are the basic types of mortgage rates available to those who want to buy investment properties.

Fixed Rates

First on the list—and the most common—are fixed rates. As the name suggests, the interest rates that are included in your mortgage do not change. They’ll remain the same throughout the deal, regardless of the situation on the market.

Fixed mortgage rates can be beneficial in terms of protecting your budget and having peace of mind that things will not change. On the other hand, these types or rates could be higher than adjustable ones, bringing us to our next point.

Adjustable Rates

The second type is adjustable rates. Contrary to fixed rates, these rates tend to change and do not retain the original payment amount. Their variability is owed to constant changes in the real estate market.

With that in mind, you should learn to set aside a specific amount of funds so that you can pay off your obligations on time and avoid getting sucked into debt, which could jeopardize your investment property.

Related: Adjustable-Rate Mortgage vs Fixed-Rate: Which Is Better for a Real Estate Investor?

Investing in Real Estate With Current Mortgage Rates

Although investing in real estate and paying off a mortgage does not seem like the brightest business idea from a lender’s viewpoint, you could still achieve a regular cash flow—with the right way of financing, that is.

As for the current situation in the real estate market, the MLS database gives you an overview of all the homes that are currently on sale. However, lenders do not make use of this information or have access to it.

Perhaps the most posed question concerns the decision of whether you should invest in real estate property, bearing in mind the current rates.

The one thing investors must note is that interest rates will always be higher if you decide to invest in a residential and rental property.  

As a general rule, you can expect an increase of 0.5 to 0.7%.

The reason for this jump is that most lenders believe that such investments are at a higher risk. So, in order to protect themselves, they will spike up your interest rates.

The current average rate is 3.84% for a primary residence. Homebuyers and investors can expect them to be around 4.25% for a primary investment property.

Also, do note a lower down payment usually means a higher interest rate.

Should You Go for It?

The question of the day: “Is it a good time to refinance a mortgage?“

Here are our thoughts on the issue.

An investment or refinancing will only make sense if you manage to reduce the rates by at least 0.75%. The closing costs will leave you some room for a profit with a similar reduction.

You can see that interest rates have risen by almost 1% since the beginning of the year. But according to experts, it is assumed that about 7 million American residents are in a favorable position to invest for the first time—or refinance their mortgage.

Out of a total of 7 million, 3.8 million were able to reduce their interest rates, which gives them an even more significant advantage. 

So, if you belong to this group, you should definitely go for it.

To be even more confident in your decisions, don’t miss the opportunity to request a helping hand from Mashvisor’s Rental Property Calculator.

Our rental property calculator helps real estate investors select the perfect location for their investment and allows them to calculate the expected profit.

States With Highest and Lowest Mortgage Rates

The US real estate market is enormous—and interest rates tend to vary from state to state. To make a more thoughtful decision, here are five states with the highest and lowest interest rates, respectively.

States with the highest rates:

• Alaska: 0.27% higher than the national average
• Montana: 0.08% higher
• Utah: 0.07% higher
• North Dakota: 0.07% higher
• Louisiana: 0.07% higher

As a consequence of COVID-19, the economic situation has induced higher interest rates. The apparent reason for this is the increased demand for cash. But a possible drawback for homebuyers is lower chances of return on investment and difficulty paying off obligations.

States with the lowest rates:

• Massachusetts: 0.14% lower than the national average
• New York: 0.10% lower
• New Jersey: 0.08% lower
• North Dakota: 0.05% lower
• Connecticut, Nebraska, Hawaii, Florida: 0.04% lower

Low-interest rates result from low-risk rates. They bring with them specific benefits, such as borrowing costs becoming cheaper or expecting higher profits on a vacation rental property.

Now, keeping in mind the interest rates in different areas, Mashvisor’s data further helps you determine the most favorable location for ensuring high cash on cash return.

Our tools deal with up-to-date information on the real estate market and allow you to have a better insight into the current situation.

Indicators That You Are Ready to Invest

We’ve gone through the most essential parts. Now it’s time to look at things from a slightly broader angle and try to answer the following question:

When are you ready to invest in a rental property?

Of course, the first step involves a detailed rental analysis, and to your luck, Mashvisor has vast experience in this area, assisting potential investors and helping them achieve this with efficiency.

Here are some critical indicators that give you the green light:

Financial Stability

The first—and most important—indicator is that you are financially stable for such a venture. That’s because most lenders will require a minimum of 15% down payment for investment properties.

You also need to make sure that you have additional savings, especially if you availed of an adjustable-rate mortgage.

ROI

A secure and regular cash flow will generally ensure a high return on investment (ROI). And to calculate this, you will need to consider your annual net and operating income.

Mashvisor’s Rental Calculator can do that for you. You just need to focus on the real estate heatmap first—and explore the most lucrative areas.

Time

One thing is for sure—you need to have enough time on your hands to manage your rental property.

Investing is not a one-time job. On the contrary, after you finish the formal part with the bank, you will have to set aside time for advertising, interviewing tenants, looking over your top competitors, and making necessary repairs to your property.

Investing in a property is a one-time thing—but investing in its value is a long-term project.

Mortgage Rates: Conclusion

We have completed another guide dedicated to helping investors and homebuyers navigate the real estate market and make wise, informed choices when investing in a rental property.

Given that today’s topic was mortgage rates, let’s go over the most critical points:

Mortgage rates are an interest that is added to your monthly payments. The current average rates are 3.84%—but you could expect an increase of up to 0.07% when purchasing a rental property.

Before you make the final call, you should be financially stable and use Mashvisor as your number one consultant for real estate investing.

Choose the plan that suits your needs—and go from there.