Hello All,

I'm in the process in buying a second home for the purpose of renting out. I plan on going with a conventional loan at 20% down, the loan officer I'm working with has me pre-qualified and has the interest rate at 5.375% (not locked in). I was told by him the only way to get the interest rate down would be to put down a bigger down payment.

Is 5.375% normal interest rate for an investment property? 

Would there be any other way to bring it down, besides a bigger down payment? 

I'm located in Virginia and my credit score averaged at 790.

Any help would be much appreciated!

Thanks!

Tom

Originally posted by @Tom Cotter :

Hello All,

I'm in the process in buying a second home for the purpose of renting out. I plan on going with a conventional loan at 20% down, the loan officer I'm working with has me pre-qualified and has the interest rate at 5.375% (not locked in). I was told by him the only way to get the interest rate down would be to put down a bigger down payment.

Is 5.375% normal interest rate for an investment property? 

Would there be any other way to bring it down, besides a bigger down payment? 

I'm located in Virginia and my credit score averaged at 790.

Any help would be much appreciated!

Thanks!

Tom

 It could be because you just said some contradictory stuff above " a second home for the purpose of renting out."

In the mortgage world a second home is similar to a primary home except that it is only used by the borrower for part of the year, like a used for vacation like a home in big bear mountain or aspen to going skiing.

A home to rent out is a non owner occupied property or investment property and as such its priced about .250 - .50% higher than a primary or second home. There is also a premium of an additional .375 to .50% in rate for 20% down versus 25% down so consider that in your calculations for your investment returns. This means that a 4.125% primary home with 20% down is around 5.125% for an investment property with 20% down on average.

Second and primary homes typically are priced the same in rate but second homes have higher down payment requirements (AKA your Loan to value or LTV goes up or your down payment has to increase).

When the lender says 90% LTV that means you're bringing in 10% down or the difference.

In this case its 80% LTV with 20 down payment.

Your rate is about right since you're doing 20% down and investment property. If you increase your down payment I bet your rate would go to 5.00 or 5.125%, just a guess.

Let us know how it goes, hope that helps.

Hi Tom, 

If the 'second home' you are referring to is an investment property, reach out to Victoria Kiser at Eagle Bank  to get a quote compare.   My experience with Eagle Bank has been that they are very investor friendly (I was able to get 15% down at a very good rate) and extremely competitive rates on investment properties.  

Kristina   

Yes, I should clarify that this is going to be an investment property, I have no plans of occupying the home.

Albert, I appreciate your detailed breakdown of all the numbers. With the interest rate on my primary home, the numbers add up to exactly what the interest rate I was quoted at. Its good to know if I can hit 25% down I bring the lower the interest rate somewhat. Again thanks for the breakdown.

Kristina, that's good to know 15% down is a possibility. I was told since this is an investment property the absolute lowest amount down I could put would be 20%. I'll definitely be in touch with Eaglebank. Thanks for the recommendation!

15% down relates more often to hard money lenders.  Since you are going the conventional route, 20% is the standard minimum down.  The more you put down, the better the rate.  You could also consider buying down the rate, but often times, the buy down doesn't generate as much of a difference that applying the funds to your downpayment would.

It makes me chuckle a little bit about an investor complaining about any interest rate under 7%.  It just shows you how spoiled we have gotten as a RE community.  I remember not too long ago when owner occupied borrowers were clammering to the lender to lock in a low 6% interest rate that appeared for only 1 day back in the 90s.  We have come a long way since then.  God only knows what will happen when the market corrects fully and rates rise. Hopefully they will never get to the levels of the 80s when you could see an 18% interest rate...and that was totally normal.  Ug.

Originally posted by @Tom Cotter :

Yes, I should clarify that this is going to be an investment property, I have no plans of occupying the home.

Albert, I appreciate your detailed breakdown of all the numbers. With the interest rate on my primary home, the numbers add up to exactly what the interest rate I was quoted at. Its good to know if I can hit 25% down I bring the lower the interest rate somewhat. Again thanks for the breakdown.

Kristina, that's good to know 15% down is a possibility. I was told since this is an investment property the absolute lowest amount down I could put would be 20%. I'll definitely be in touch with Eaglebank. Thanks for the recommendation!

As a side note, so you know the "hit," or pricing adjustment for 15% down on non owner investment properties is 4.125 points. This is a fannie mae adjustment so anyone including eagle mortgage will have to factor that into your pricing.

As a general rule every .50 pts is about .125% rate so if you're at a 4.250% with no points and you want to add that 4.125pt pricing hit you're going to be around 5.25%-5.375% (subject to change on an estimate) to keep "no points," otherwise you gotta bring in cash for the points to maintain a lower rate.

Now if all of this sounds like a buncha mortgage hoopla it basically means your rate will be significantly higher with 15% down than with 20% or 25%.

HIts for:

15% Down non owner - 4.125 points - adds about 1.00 to 1.125% to your rate

20% Down non owner - 3.375 points - adds about .50 to .75% to your rate

25% Down non owner - 2.125 points - adds about .25 to .375% to your rate

Just figure your base rate is around 4.25% currently with no points ... (estimate) on a primary residence and you can do the math yourself above and add those adjustments for being an investment property.

There are potentially other adjustments as well such as impounds, no impounds, condo vs SFR property, and the list can get longer but the above is to give a general idea of what you're dealing with.

@Tom Cotter if you don’t mind me asking, what lender have you been working with?

I just closed 12/28 on a SFR. 20% down. 5.25% conventional 30 year. Could have gotten 5.125% with 25% down. Seems about right to me.

If this is for conventional that seems high, unless rates have gone up since I last checked.

I checked about two months ago and locked in at 4.75 percent. My credit score is below 740.

Originally posted by @Caleb Heimsoth :

If this is for conventional that seems high, unless rates have gone up since I last checked.

I checked about two months ago and locked in at 4.75 percent. My credit score is below 740.

 2 months ago???!!  I am laughing right now.

@Cara Lonsdale  I’ll take that to mean rates have gone up.  I think you can still find under 5 percent rates 

I just checked and I’d say 5-5.125 seems about right.

Originally posted by @Caleb Heimsoth :

@Cara Lonsdale  I’ll take that to mean rates have gone up.  I think you can still find under 5 percent rates 

 I was laughing because the thought of interest rates (at any level up or down) being the same for a consistant 2 month period is not realistic.  This is a market that is watched on a daily basis....sometimes minute by minute.  So, taking your rate from 2 months ago, and assuming that someone in the marketplace today could get that rate because you did, is laughable.  Rates are changing constantly.

I hope you don't invest in the stock market with that mentality. :)

Rates are high, everyone is pissed, not much to do about it but keep in mind that from here there are 3 possibilities moving forward:

- Rates stay the same (unlikely). This is the new normal. Ho hum.

- Rates go down. Awesome, you refinance and your payment goes down!

- Rates go up. Awesome, glad that you locked in what you did, when you did, as a 30 year fixed, instead of trying to time the market!

I'm working on a 20-unit deal and that's the rate I was quoted on a 5-20 adjustable with 25% down.

Originally posted by @Caleb Heimsoth :

If this is for conventional that seems high, unless rates have gone up since I last checked.

I checked about two months ago and locked in at 4.75 percent. My credit score is below 740.

HI Caleb,

There are many factors in determining rate, such as:

- pricing adjustments for your state, certain states have higher risk criteria and add .125 or .250 pt in cost (higher rate) 

- TX cash out is riskier because of TX primary residence home equity laws on cash outs from 70-80% of LTV in your home

- how the fannie mae 30 year bond is doing, it changes every day and multiple times per day

- did you pay points in your 4.75% above?

- what type of property you financed, a SFR, 2-4 unit, condo, etc

- did you impound your taxes or not impound them - not impounding costs .15 adjustment/points, some lenders absorb this and have no cost

- the list can go on from here

Originally posted by @Jill F. :

I'm working on a 20-unit deal and that's the rate I was quoted on a 5-20 adjustable with 25% down.

 we're talking fannie mae 30 year bond or 30 year rates here, based on your deal sizing and area that is probably a regional bank or commercial bank lending their portfolio money for a commercial (MFH) asset. That would be completely different but the good news it does give people on here some perspective on the differences between commercial and residential agency rates (fannie/freddie).

What would the rate be for a 15yr I wonder? My last cash out rental refi in Sept at 75 ltv was .4% lower (4.25 vs 4.625%) than a 30. 

In 2012 when I refinanced everything possible, the 15yr rate was almost 25% lower than a 30.  Check out a 15. Sometimes the difference is huge.

I chose 15s because of the rate arbitrage and a couple hundred in extra cash flow doesn't move the needle anyway. Especially considering that little amount doubles the length of  your 'til death, I mean muerte, I mean mortgage.

Originally posted by @Steve Vaughan :

What would the rate be for a 15yr I wonder? My last cash out rental refi in Sept at 75 ltv was .4% lower (4.25 vs 4.625%) than a 30. 

In 2012 when I refinanced everything possible, the 15yr rate was almost 25% lower than a 30.  Check out a 15. Sometimes the difference is huge.

I chose 15s because of the rate arbitrage and a couple hundred in extra cash flow doesn't move the needle anyway. Especially considering that little amount doubles the length of  your 'til death, I mean muerte, I mean mortgage.

The range between a 30 and a 15 varies but most of the time the spread is about .50% but like you said it can narrow when the 30 year bond is selling better (higher bond price, rates down) relative to the 15 year bond for 15 year fixed products (lower price, higher rates for 15 year)

Originally posted by @Caleb Heimsoth :

If this is for conventional that seems high, unless rates have gone up since I last checked.

I checked about two months ago and locked in at 4.75 percent. My credit score is below 740.

 I looked into refinancing a investment duplex about two months ago. FICO about 780, rate quoted 4.75%. 

 2 months ago???!!  I am laughing right now.

 Why?

Originally posted by @Albert Bui :

Originally posted by @Tom Cotter:

Hello All,

I'm in the process in buying a second home for the purpose of renting out. I plan on going with a conventional loan at 20% down, the loan officer I'm working with has me pre-qualified and has the interest rate at 5.375% (not locked in). I was told by him the only way to get the interest rate down would be to put down a bigger down payment.

Is 5.375% normal interest rate for an investment property? 

Would there be any other way to bring it down, besides a bigger down payment? 

I'm located in Virginia and my credit score averaged at 790.

Any help would be much appreciated!

Thanks!

Tom

 It could be because you just said some contradictory stuff above " a second home for the purpose of renting out."

In the mortgage world a second home is similar to a primary home except that it is only used by the borrower for part of the year, like a used for vacation like a home in big bear mountain or aspen to going skiing.

A home to rent out is a non owner occupied property or investment property and as such its priced about .250 - .50% higher than a primary or second home. There is also a premium of an additional .375 to .50% in rate for 20% down versus 25% down so consider that in your calculations for your investment returns. This means that a 4.125% primary home with 20% down is around 5.125% for an investment property with 20% down on average.

Second and primary homes typically are priced the same in rate but second homes have higher down payment requirements (AKA your Loan to value or LTV goes up or your down payment has to increase).

When the lender says 90% LTV that means you're bringing in 10% down or the difference.

In this case its 80% LTV with 20 down payment.

Your rate is about right since you're doing 20% down and investment property. If you increase your down payment I bet your rate would go to 5.00 or 5.125%, just a guess.

Let us know how it goes, hope that helps.

 If I am understanding this correctly, If I am looking to purchase a house with the intent to rent out. Do not tell the bank that I am going to rent this house out because it will bring your interest rate up? 

Originally posted by @David Wong :

Originally posted by @Albert Bui:

Originally posted by @Tom Cotter:

Hello All,

I'm in the process in buying a second home for the purpose of renting out. I plan on going with a conventional loan at 20% down, the loan officer I'm working with has me pre-qualified and has the interest rate at 5.375% (not locked in). I was told by him the only way to get the interest rate down would be to put down a bigger down payment.

Is 5.375% normal interest rate for an investment property? 

Would there be any other way to bring it down, besides a bigger down payment? 

I'm located in Virginia and my credit score averaged at 790.

Any help would be much appreciated!

Thanks!

Tom

 It could be because you just said some contradictory stuff above " a second home for the purpose of renting out."

In the mortgage world a second home is similar to a primary home except that it is only used by the borrower for part of the year, like a used for vacation like a home in big bear mountain or aspen to going skiing.

A home to rent out is a non owner occupied property or investment property and as such its priced about .250 - .50% higher than a primary or second home. There is also a premium of an additional .375 to .50% in rate for 20% down versus 25% down so consider that in your calculations for your investment returns. This means that a 4.125% primary home with 20% down is around 5.125% for an investment property with 20% down on average.

Second and primary homes typically are priced the same in rate but second homes have higher down payment requirements (AKA your Loan to value or LTV goes up or your down payment has to increase).

When the lender says 90% LTV that means you're bringing in 10% down or the difference.

In this case its 80% LTV with 20 down payment.

Your rate is about right since you're doing 20% down and investment property. If you increase your down payment I bet your rate would go to 5.00 or 5.125%, just a guess.

Let us know how it goes, hope that helps.

 If I am understanding this correctly, If I am looking to purchase a house with the intent to rent out. Do not tell the bank that I am going to rent this house out because it will bring your interest rate up? 

Lol okay that is willingful mortgage fraud just saying... 

There is however, a difference between air bnb’ing a couple rooms out while living there or renting rooms out while living there and completely outright lying to get a primary residence loan and then immediately converting it to an investment property.

Some people just have no ethics I would refuse to do this loan if the borrower told me that. 

Yeah, I just had to ask. Thank you @Albert Bui . I do not intend to do anything like that, but had to ask. Still green behind the ears. 

Originally posted by @David Wong :

Yeah, I just had to ask. Thank you @Albert Bui. I do not intend to do anything like that, but had to ask. Still green behind the ears. 

 Of course, I noticed you served as well.

The VA program is great to use to purchase a 4 plexus house hack with 0% down payment.

You’d be living in one unit while renting out the other 3.