August 31, 2021
7 MINUTE READ
Investing in real estate is one of the best options for making money in both the short-term and the long-term. Successful real estate investors can achieve financial security not only for themselves but for their children and grandchildren.
You don’t need to have vast sums of cash to get into real estate. With an abundance of investment mortgages, even the average person has the potential to create an immediate cash flow.
Finding a competitive rate investment property mortgage isn’t always the easiest thing. Let’s take a look at current investment property mortgage rates and how to shop for the best mortgage.
There is a difference between primary residence mortgage rates and investment mortgage rates. Although you will find investment property interest rates to be higher, they’re not always significantly higher. Investment property loans typically carry an additional 0.5% to a 1% surcharge on the interest rates.
The simple reason investment property mortgage rates are higher is that they are considered a riskier proposition for lenders.
Most investors use the business model of renting out an investment property and using the rental income to make monthly mortgage repayments. Rarely will these payments come from the investor’s day job.
If their rental income goes south, there is a high possibility of the investor defaulting on the mortgage. At that point, the lender’s only option is to foreclose on the home. The investor’s primary home is considered less risky than a rental home because investors are unlikely to fight as hard for their investment home as they would for their primary residence.
All these factors contribute to higher rental property mortgage rates because it’s the only way the lender can protect themselves.
Investment property interest rates vary all the time. It’s difficult to give a hard figure because not all lenders charge the same. Several factors influence how much a lender will charge, including income, debt, cash reserves, and credit score.
The majority of lenders typically increase standard property mortgage rates by 0.5% to 0.75% for investment properties.
For example, if you are taking out a primary mortgage, the average 30-year fixed interest rate may be 3.92%. The average 15-year fixed interest rate may be 2.97%.
So, what can you expect to pay based on current investment property mortgage rates?
The average interest rate for a 30-year fixed investment property mortgage may be 4.42% to 4.67%. For a 15-year fixed investment loan, you may expect to pay 3.47% to 3.72%. Again, this depends entirely on the lender in question, your current circumstances, and, especially, how much your down payment will be.
It’s important to calculate your potential monthly repayments and your expected rental yield to determine whether you’re likely to get approved for an investment loan.
For example, let’s say you wanted to purchase a $300,000 house in California with a 30-year mortgage. You have a down payment of $60,000, which is 20%. Assuming you had a high credit score and received a favorable rate of 4.4%, your monthly repayment would be $1,202 on the principal mortgage amount plus interest. This example assumes you have a high credit score and receive a favorable interest rate based on current averages. Interest rates can and do vary greatly, however, so you must do your research.
Other than conventional mortgages, as described above, you have access to the same financing options as buyers of primary residences.
The difference is they cost more, and the chances of approval are lower. The ideal type of loan depends on your business model, what you want to achieve, and your circumstances when you apply. It’s worth looking into several types of loans and talking to an expert to determine the right loan type for your particular situation.
Both VA and FHA loans are available for real estate investors, but only if they purchase a multi-unit property and intend to use one of the units as their primary residence.
Down payments can be as low as 3.5% for an FHA loan and 0% for a VA loan, assuming you have completed the minimum period of military service and met all other requirements. Interest rates typically match those of primary residence mortgages because FHA and VA mortgage rates are lower than average.
It can be challenging to get approved for these loans simply because these programs’ goal is to provide affordable residential housing. They were not designed for investors.
Portfolio lenders operate by their own conditions when it comes to mortgage rules and rates. The benefit of portfolio loans is you may be able to make a smaller down payment. The downside is interest rates could range from 5% to 12%.
Hard money loan providers require higher interest rates and higher fees. In 2020, interest rates averaged 11.25% nationwide, but they ranged from 7.5% to 15%. The only reason to take out a hard money loan is the speed of approval. It’s the fastest way to get a mortgage for investing in real estate.
If you want to purchase a dwelling of more than four rental units, or you want to borrow against the income of the property, commercial residential loans are an alternative financing option.
To qualify, you will usually need to create a separate remote entity, which prevents the owner from taking out rental income before making their monthly mortgage repayment. These loans can be expensive and difficult to set up with interest rates ranging from 2.25% to 12%.
Even small differences in interest rates can add up to thousands of dollars over the full period of your mortgage. The mortgage interest rates for investment property depend on certain characteristics lenders look for when assessing a borrower’s application for lower interest rates.
Here are some tips for getting better interest rates.
Real estate investing is not for everyone. It takes a certain kind of person to be successful in this business. Expect to put a lot of time and effort into your real estate business.
Despite what some gurus say, real estate investing isn’t guaranteed money. If you’re a more “hands-off” investor, you may prefer to look into alternative investment options.
Let’s take a look at the pros and cons of investing your money in real estate.
Before deciding whether real estate investing is for you, it’s important to factor in investment property mortgage rates. A single percentage point of difference could add up to thousands of dollars saved over the period of a 30-year fixed-term investment mortgage.
At Reali, we can help you find a mortgage that lowers your investment costs and allows you to begin making a solid, regular income for yourself and your family. Many of our customers have already saved thousands of dollars by speaking to us. We can also help you find houses to buy.
Contact us to learn more about investing in real estate for the first time.