Interest rate for investment properties

9 Replies

Hi All,

I was wondering what the typical spread is between interest rates for a conventional 30 yr loan for a primary residence vs. a rental property?  My lender quoted me at 5.375% for rental property loan with 20% down (150-200k purchase price).  Looks like current rates for a regular loan are in the high 3's or low 4's.  Is this difference to be expected from most lenders for a rental property?  

Thanks!

Originally posted by @Eric Lee :

Hi All,

I was wondering what the typical spread is between interest rates for a conventional 30 yr loan for a primary residence vs. a rental property?  My lender quoted me at 5.375% for rental property loan with 20% down (150-200k purchase price).  Looks like current rates for a regular loan are in the high 3's or low 4's.  Is this difference to be expected from most lenders for a rental property?  

Thanks!

 This is from fanniemae.com:

Those are what it would take, in discount points, to get the same rate you see advertised everywhere. That 3.375% and 4.125% you see there are why lenders that offer 20% or 15% down for investment properties can very quickly get a reputation for having "high rates," causing many lenders to not even offer anything less than 25% down, basically just to guard their reputation even though this is straight from the top (Fannie Mae) and not lender-specific. If you wish to put 20% down but do not wish to pay 3.375 points on top of that, you can take the bump in the form of a rate hike.

There are similar adjustments for FICO scores, 2-4 unit properties, and various other things. Basically every little thing separating you from an owner occupant first time homebuyer putting 25% down with a 740 FICO score is another "loan level pricing adjustment."

Even before all those adjustments, rates in general spiked on the most recent election day (you could say rates are "Trumped" up, omg I crack myself up) and have not come back down to pre-election levels. When you see investors talk about their 3.75% investment property note, it was Q4 2011 or Q1 2012, the folks at 4.25% often went into contract Jan 2015, etc. And of course folks bragging about their killer interest rate while listening to "Hipster Cocktail Party" on Pandora might not mention that they spent 2 or 3 discount points buying it down as a fashion choice, not necessarily a rational economic one.

You can't day-trade when you go into contract, nor are you in a position to alter the presidential election results, but you can (and should) day-trade when you refinance. There will be another Q1 2012, and another January of 2015, etc.

Granted it's 5-6 year terms but I'm still getting 4.5% or lower on 80% LTV commercial multifamily

Hi @Chris Mason , thanks for the info.  So just playing with some numbers, for a 150k property (20% down, 130k loan), to lower the interest rate from 5.375 to 4.375 would require 4 points ($5200), is that right?  This would lower monthly payments from 672 to 599.  With that 73 dollars a month saving, it would take about 6 years to recoup the 6k.

Is this an accurate analysis, or is there anything else I'm missing that should be factored in?  Cashflow for rental properties in my area seem pretty low, so I'm wondering if buying points to lower the monthly payments is a viable/wise option.

Originally posted by @Eric Lee :

Hi @Chris Mason, thanks for the info.  So just playing with some numbers, for a 150k property (20% down, 130k loan), to lower the interest rate from 5.375 to 4.375 would require 4 points ($5200), is that right?  This would lower monthly payments from 672 to 599.  With that 73 dollars a month saving, it would take about 6 years to recoup the 6k.

Is this an accurate analysis, or is there anything else I'm missing that should be factored in?  Cashflow for rental properties in my area seem pretty low, so I'm wondering if buying points to lower the monthly payments is a viable/wise option.

 Your lender can run that for you, but it's probably in that ballpark. But before you get too hung up in that number or runt he risk of "putting the financing before the property," let me toss a question back at you.

Is there really nothing else you can do to increase cashflow $73/mo that might be cheaper than $5200? How much does a can of paint, a new stainless steel oven range, and/or a new washer/drier, run in your area? I don't know this property or your rental market at all, and your lender will likely do whatever you insist on, but that's where I go when people start talking themselves into high amounts of discount points (granted here in the Bay Area 4 points might be $20k not $5k).  For you as a landlord, recall that your tenants are paying the interest, that you then get to turn around and write off when you do your taxes to double dip, anyways. 

Generally discount points up in that range is what empty nesters 5 years from retirement do, when they are buying the home they will die in. They have the $5k (or $20k) today while still earning, but that $73/mo (or $300/mo) will mean a lot to them once they are on their permanent retirement income. And on top of that, the empty nesters can write the 4 discount points off now while they are in a higher tax bracket. Their mortgage interest deduction will be less, of course, but their tax bracket is lower in retirement too.

@Chris Mason as usual, you're going a long way towards demystifying Fannie Mae for us. Thanks.

Two questions:

1) is there a sound resource you recommend for the daily benchmark rate these numbers refer to?

2) when I hear the financial news say, "mortgages ticked down to 3.96% with an average of .20 points (making those numbers up), does that relate to the chart you posted?

Thanks!

Originally posted by @Dan Schwartz :

@Chris Mason as usual, you're going a long way towards demystifying Fannie Mae for us. Thanks.

Two questions:

1) is there a sound resource you recommend for the daily benchmark rate these numbers refer to?

2) when I hear the financial news say, "mortgages ticked down to 3.96% with an average of .20 points (making those numbers up), does that relate to the chart you posted?

Thanks!

 This is Freddie Mac's index updated every Thursday, and here it is in App format if you want it on your cellular phone. We're obviously mixing/matching resources from Fannie and Freddie here, but their LLPAs are virtually identical. 

That index tracks the 100% vanilla "Jesus Walking on Water" scenario that very few people meet, for conforming (not high balance or jumbo) loans, owner occupants, 20%+ down, points upfront, single family only, etc etc etc, so if you're on bigger pockets you probably will never get that because no one here is that vanilla. 

So if you add up all the discount points from Fannie Mae's LLPA chart linked above, add a 0.5 to 1 point to that because Freddie's index already tracks bought down rates, that's about what it would take to get to what's tracked by that index. Most people end up taking the bumped rate. I know it's frustrating for consumers to see bought down rates advertised/tracked everywhere, but if you're the only one putting 'no points' rates out there, you don't get business and will lose 10 potential customers for every 1 that appreciates the transparency!