Find out about average rental property mortgage rates, how they differ from conventional mortgages, and explore some ideas to help you score the best rates on your investment properties.
Average Rental Property Mortgage Rates
Mortgage rates for investment properties fluctuate, just as they do for primary residences. Generally speaking, interest rates for investment properties are higher than the ones you’ll see when buying a home for personal use. This is due to the fact that banks consider investment properties to have a reasonable amount of risk. Because of this, not every bank will choose to offer mortgages for investment properties.
Investment Property vs. Primary Residence Mortgages
This is in contrast to primary residences, where homebuyer programs and specialized loans can allow you to put down as little as 3.5%—or even skip a down payment altogether.
Income Requirements
Since the point of purchasing an investment property is to generate income, many banks will allow you to include future anticipated rent as part of your monthly income. This can help tip the scales in your favor when it comes time to calculate your debt-to-income (DTI) ratio. When looking to buy your primary residence, however, you’ll need to qualify using your existing debt-to-income (DTI) ratio.
Taxes
Investment properties are treated differently than primary residences when it comes to taxes. Common owner expenses, such as maintenance, insurance, taxes, and mortgage interest are tax-deductible. Primary residences, meanwhile, may only deduct the interest on the first $750,000 (or $375,000 if married and filing separately) of your mortgage.
How to Get the Best Rates for Your Rental Property
Although getting financing for an investment property can be costly, there are ways to navigate better mortgage rates.
Live in a Unit
While it may not be something you’ve previously considered, purchasing a multi-family unit and living in one of the units can be a good option. FHA, VA, and USDA loans allow you to buy a property with up to four units as long as you intend to live in one of them. Government-backed loan interest rates can be competitive with conventional mortgages, but more than this, using the anticipated income from these units can help you qualify for your loan.
Contribute a Sizable Down Payment
Lenders already mandate a larger down payment when purchasing a rental property compared with primary or even secondary residences. However, contributing more than the minimum requirement they ask for—which is usually as little as 15%—can help bring down your investment property mortgage rates.
Raise Your Credit Score
As with any transaction involving debt, your credit score will affect the rate that you receive. Although we’ve mentioned this several times already, it’s worth repeating: the rate you are able to negotiate for an investment property will directly reflect the amount of risk the bank perceives it’s taking on. For a lender, a higher credit score means you’re a more stable investment, and the interest rate it will offer you will be lower as a result.
Use As a Second Home
Do you have any intention of living in the property? If so, you may want to consider seeing if you qualify to purchase a second home rather than an investment property. Second homes feature lower interest rates and lower down payment requirements than investment properties, but you’ll want to be sure that your property is eligible.
The Bottom Line
Rental properties can be a great way to grow your money. Offering a steady passive income and the ability to appreciate, real estate makes a compelling option for investment. However, qualifying for a loan on a rental property isn’t as easy as other mortgages, and it can be more costly. Take advantage of the tips outlined above to get the best rental property mortgage rates. Restrictions,” Page 4-B-2.
