Mortgage Interest Rates Higher for Rental Properties?

Question

Hello Everyone,

I am in the process of educating myself before I purchase my first few rental properties. I have heard that the mortgage rates for a 15 or 30 year loan are a little bit higher than if you were to get a mortgage on a primary residence. For instance primary residence mortgage 30 year might be 3.5% but for a 30 year on a rental might be 4%.

Is this true? If so where can I find out what rental mortgage interest rates are in my area? I tried checking some bank sites online but didnt see anything about interest rates for rental or investment properties.

Joel Owens · Answer

The reason rates are higher is simple. If you live in a property you will fight tooth and nail to have a place to sleep at night and call home.

With an investment property if you don't want to pay taxes on vacant land, tired of being a landlord, have a money pit for an investment many will just walk away from it.

All the lenders know this based on historical data so charge more basis points on the NOO loan to compensate for the increased risk.

David Beard · Answer

Of significance with your initial purchases is that you will not be given any credit in your Debt-to-Income ratio for the rental income, until you have two years of proven landlording experience (documented on tax returns).  So bear in mind that you will initially have to carry the entire PITI of the properties that you purchase in the numerator of the DTI ratio.  That ratio can typically go up to 40-45%, depending on your credit score.

Perhaps you have a very low DTI ratio currently, which would be great, but some folks need to focus on eliminating consumer debt in order to free up some room in the ratio to make their initial purchases.  This can be a challenge.  One solution can be to borrow from a 401-K plan (up to 50K allowed) and pay off consumer debt.  The 401K loan will require a monthly payment, but that payment is just made back to your 401K and is not included in your debt ratio calcs.

Jon Holdman · Answer

Look at advertised mortgage rates and add half to one percent.  No, I've never seen them advertised.  You will need to work with a lender or broker to get a specific rate.  The same thing is actually true for the advertised rates.  They're ads, not loan commitments.

Paul M. · Answer

TD Bank gives the same rate for investment properties as they do for owner occupied.    You will need 25% equity.    A local bank might also do it.

Seth Williams · Answer

Keep in mind, your down payment for a multi-unit property will likely be higher as well - so be sure you have adequate cash available for this. I bought a duplex earlier this year and the absolute minimum that any bank would accept was 25%. To my knowledge, this is an actual federal requirement for banks and credit unions to meet when they are getting a govt guarantee on their debt (and most of them do).

Curtis C. · Answer

David Beard Thats a great point David, I was actually unaware of the two year rule. Thats actually quite significant for me at this point in time. My DTI is decent, but adding a rental property or two might break that.

Perhaps I should start off with some owner financed properties, and pick them up with cash?

Kyle J. · Answer

I always just call around to multiple banks and ask them. It may be a little more time consuming then checking online, but - as Jon mentioned - the investment rates usually aren't advertised anyway. Plus, when you actually speak with someone at the bank, it gives you a chance to ask them other questions about their rules/requirements for loans on investment properties. For instance, the LTV they'll loan at, number of loans they will allow you to have, any fees they may charge for non-owner occupied loans,different loan programs available, etc.

For what it's worth, I think you shouldn't have any trouble finding rates in the low to mid 4% range.

Bryan Hancock · Answer

Amerisave is pretty accurate iff (if, and only if) you feed it completely accurate data.  I have found them to be very hard to use because they want extremely huge amounts of data to underwrite loans.  Since we own a lot of property it is very difficult to give them everything they need and fit our scenario in their box.

Amerisave is good for looking at rates, but I would recommend talking to some local brokers or lenders to see what you'll qualify for.

Curtis C. · Answer

Bryan Hancock Thanks Bryan that looks like a great tool. I got around 3.75% to 4% in my area, that sounds reasonable to me. Would you say that tool has been pretty accurate for your area in Austin>

Bryan Hancock · Answer

Amerisave:

Amerisave Site

will allow you to enter scenarios for rental properties in your area.

Mortgage Interest Rates Higher for Rental Properties?

Most Popular Reply