Making money in real estate has always been predicated on getting good investment property mortgage rates. In fact, financing might be the most determining factor when it comes to generating a profit in the housing market. So how should you go about finding good mortgage interest rates for rental property? And what are the best practices that you should abide by when looking for the best mortgage rates? This guide will illuminate the importance of affordable investment loans in real estate and show you how to get the best rental property mortgage rates.
Understanding Rental Property Mortgage Rates
The first thing you need to know about rental property mortgage rates is that they are slightly higher than standard rates. Current mortgage rates are around 3.7% for owner-occupied loans and about 0.75% higher for investment property loans. The reason behind this discrepancy is due to the riskier nature of rental properties relative to primary residence purchases.
The Importance of Getting Good Interest Rates When Buying a Rental Property
Obtaining a mortgage at a good interest rate is an integral part of real estate investing. It might not seem that consequential upon first glance, but a difference of a few percentage points can be highly significant for your bottom line. In fact, a mortgage that comes at higher than the ideal rate will invariably result in a longer repayment period, a higher monthly expenditure, and an overall lower return on investment. What initially appears as a slight difference can end up costing you untold amounts over the following years.
Let’s now delve into how you can find the best rental property mortgage rates.
How to Get the Best Rental Property Mortgage Rates
Many novice real estate investors make the mistake of settling for whatever is being offered to them by the nearest mortgage lenders. Naturally, this is not the right approach. Savvy investors should go out of their way to find the best rental property mortgage rates. Here is the proper way to do so.
1- Boost your credit score
Improving your credit score is the first step towards getting good rental property mortgage rates. This is the first thing mortgage lenders look at when assessing your loan application. A good credit score signifies a lower risk from the lender’s point of view. As a result, borrowers with exemplary scores are more likely to receive a favorable loan term. Here are some of the ways to increase your credit score:
- Make sure to pay your bills in a timely manner.
- Pay off credit card debt and other forms of unsecured debt in order to improve your debt to income ratio.
- Maintain a positive balance and avoid letting your account fall into debt.
Related: How Can You Improve Your Credit Score for Financing Investment Properties?
2- Make a large down payment
Making a large down payment for a rental property is one of the most effective ways of driving your interest rate down. In fact, loan costs will go down substantially if you manage to make a down payment of at least 20%. Moreover, a sizable down payment will save you a lot of money by slashing your mortgage insurance bill.
Another factor to keep in mind when saving for a down payment is the amount of cash reserve that you have. Being able to make the payment is only half the requirement as mortgage lenders need the borrower to have ample savings, too. Cash reserves can be anything from cash to liquid assets like stocks. The minimum cash reserve varies depending on the particularities of the loan, but generally speaking, you should have a few months’ worth of mortgage payments in liquid assets.
Related: What You Need to Know About the Down Payment for Rental Property
3- Opt for a loan type other than the standard 30-year fixed rate
A 30-year fixed rate might seem like the ideal option when looking for low rental property mortgage rates. However, this is not necessarily the case. While long-term fixed rate mortgages result in lower monthly payments, the overall interest that you pay throughout the repayment period will be quite high. Short-term loan solutions such as adjustable rate mortgages (ARMs) can be a good alternative to the 30-year fixed loan. If you’re confident in your ability to generate enough cash flow to cover the increased payment, this investment property financing option is worth a serious consideration.
Another option that every real estate investor should consider is the 15-year fixed-rate mortgage. Naturally, this real estate investment loan will allow you to pay off the rental property sooner and at a lower cost than the standard 30-year loan. But more importantly, it is less risky than adjustable rate loans.
4- Shop around for favorable terms
When looking for the best rental property mortgage rates, comparing multiple lenders is always a recommended approach. Don’t limit your search to your local mortgage providers and financial institutions. Moreover, the process should also include extensive online searches as affordable loans can often be found across the country. The value of comparative analysis cannot be overstated as recent studies have shown that borrowers can save a lot of money by simply exploring their options.
Alternative Real Estate Financing Methods
It is worth noting that there are other ways to get affordable financing without working with financial institutions. Seller financing is a good example of an alternative method that can be quite effective if implemented properly. This is essentially an arrangement in which the homeowner agrees to provide the real estate investor with a private mortgage. However, these loans tend to have terms of 5 years or less, which increases the risk of refinancing. If this happens, the new lender might require another property valuation which could lead to several extra costs such as mortgage discharge fees and mortgage insurance.
Related: Everything You Need to Know About Selling and Buying a Home with Owner Financing
The Bottom Line
Making sure that you are getting the best possible rental property mortgage rates should be at the top of your priorities when investing in real estate. Take your time during this process and explore every available option before making your decision. In the meantime, visit Mashvisor and start an investment property analysis to get a concrete idea of how mortgage rates will affect your return on investment. Click here to get sign up and get started.