Rental Property Investor · Tysons Corner, VA · Member since 2016 · 51 posts · 13 votes
I asked a broker to quote a refi for one of my properties both as a rental and as a primary, to see what gives. The only difference was the interest rate on the rental was 62.5bps higher. I was anticipating a higher rate but was caught by surprise by the spread, which I guess implies a considerably higher risk...
I understand during bad times an owner will walk away from a rental property before a home. On the other hand a rental offers additional income (not guaranteed, of course).
Curious if there're better ways to go about this. Are there specialized lenders for investors out there? Would presenting the lease agreement help out? Market stats re dom?
I attempted to get the loan thru Quicken first. Fees/closing costs were $4500, plus they wanted to escrow my taxes, another $1500 up front.
The small bank commercial loan was a no brainer for me..
When you pick the largest mortgage bank in the country that's known for having "meh" pricing to fund the largest mortgage marketing budget in the country with hundreds of script-reading LOs in cubicles who have all signed (& this is lawful) do-not-compete/do-not-broker agreements, yes commercial financing will be better. heh.
If I ever went back to grad school and picked marketing as what I'd study, it would be how a large enough marketing budget can offset almost any other hurdle a business could possibly have, and Quicken Loans would be my case study. And this isn't me talking smack, they've built a VERY successful business by doing nothing else than having the best marketing that's out there for their product!
Don't get me wrong, their commercials are stellar. Huge production values, hilarious, witty, disarming, all that. But not free or cheap to keep plastered all over my and your facebook feed. That $4500 was just them having you pay for them to clutter up your own facebook/google/instagram/podcast feed, nothing more, nothing less.
Most of the action in mortgage loan originating is keeping costs down. All of the money comes from Fannie Mae, it's just a matter of how many intermediaries and expense items are between the money and the borrower. Run thin, as thin as possible. Federal law says there has to be an LO, so I'm there no matter what. California law says my license must be hung with a California real estate broker (stupid) to be 1099 and broker mortgages, so that expense is also there no matter what. After that, as little middle management as possible is best. Use things that are turnkey and cost effective: $125/mo is my website, email server, loan application, document portal, calendar scheduling app, all the little pretty bells and whistles that consumers expect you to have, and then you gotta read a book a year ($25/yr) on SEO since that is always changing. $60/mo is the loan origination software. $60/mo is the interest rate comparison software that pulls rates from hundreds of lenders. Doesn't take much else - Sure, you gotta wear pants to work, so there's that.
Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
7y
@Daniel Alvarez I believe a loan on a rental property should be at least .005% higher than getting a loan on a primary residence for that same property if the borrower is deemed a good risk to lend to. As far as I know, even the most qualified borrower is looking at an additional 1/2% higher loan rate on an investment loan compared to an OO loan.
Rental Property Investor · Tysons Corner, VA · Member since 2016 · 51 posts · 13 votes
7y
Great thanks for all the responses. Wonder if the risk to the lender is that much higher, or if it’s just the way it’s always been done. Welcome any thoughts.
@Eric Veronica are there any particular key variables that help close the rate gap e.g. large portfolio etc. ?
Lender · Chicago, IL · Member since 2018 · 352 posts · 147 votes
7y
@Daniel Alvarez always good to give an exact Scenario, so I ran a scenario thru my pricing engine just to give you an example. A $400,000 fourplex with 5% downpayment owner occupied with Freddie is at 4% on a 30 y fix, no origination or discount points and as investment with 25% downpayment is 5.125% on 30 y fix no origination or discount.
Lender · Chicago, IL · Member since 2018 · 352 posts · 147 votes
7y
@Daniel Alvarez I just read your post again, I didn't realized this is a refi and not a purchase, but you didn't specify, is this a cash out or rate & term? What kind of property? MF, SFR, condo?
Great thanks for all the responses. Wonder if the risk to the lender is that much higher, or if it’s just the way it’s always been done. Welcome any thoughts.
@Eric Veronica are there any particular key variables that help close the rate gap e.g. large portfolio etc. ?
Fannie Mae pays less for investment property loans. She has aggregated data on trillions of dollars of mortgage debt, and prices according to the risk that data says exists.
2.125% of loan amount less @ 75% LTV, 3.375% @ 80% LTV, a tad over 4% @ 85% LTV. And another hit for multifamily, etc. FICO scores, all those factors you're familiar with.
Simplified model, Fannie Mae would pay $97,875 for a 25% down SFR investment loan of $100,000, meaning the lender would lose money for doing the loan.
But Fannie Mae pays more for loans with higher rates. Ballpark 0.5% per 0.125%.
So, add up all the hits. Bump the rate in increments of 0.125% until those chunks of 0.5% about equal all the hits. Bump rate 0.125% and now she's paying $98,375. Keep on going, that's not enough. You will get there eventually. And this is your "no points" interest rate.
Lender · Cleveland, OH · Member since 2011 · 588 posts · 438 votes
7y
@Daniel Alvarez I dont mean to sound preachy but you may want to re-evaluate the true cost of these rates. Sure, interest rates on investment properties are slightly higher when comparing against a primary home but you are borrowing to fund an investment. Compare these financing terms to what other local businesses are offered by banks and you may have a different perspective. Ask a business owner if they would take a 30 year fixed at 4.75% with no balloon and no adjustment. I am sure that they would take those terms in a heartbeat.
Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
7y
@Daniel Alvarez
I closed on a loan this past Friday. I owned the SFR rental property free and clear. It was a commercial loan with a small 3 branch local bank. I borrowed $60k, 5.25%, 20 years, first 5 years fixed, possible negotiations for another 5 years fixed. Total Fees were $885.
I attempted to get the loan thru Quicken first. Fees/closing costs were $4500, plus they wanted to escrow my taxes, another $1500 up front.
The small bank commercial loan was a no brainer for me..
I attempted to get the loan thru Quicken first. Fees/closing costs were $4500, plus they wanted to escrow my taxes, another $1500 up front.
The small bank commercial loan was a no brainer for me..
When you pick the largest mortgage bank in the country that's known for having "meh" pricing to fund the largest mortgage marketing budget in the country with hundreds of script-reading LOs in cubicles who have all signed (& this is lawful) do-not-compete/do-not-broker agreements, yes commercial financing will be better. heh.
If I ever went back to grad school and picked marketing as what I'd study, it would be how a large enough marketing budget can offset almost any other hurdle a business could possibly have, and Quicken Loans would be my case study. And this isn't me talking smack, they've built a VERY successful business by doing nothing else than having the best marketing that's out there for their product!
Don't get me wrong, their commercials are stellar. Huge production values, hilarious, witty, disarming, all that. But not free or cheap to keep plastered all over my and your facebook feed. That $4500 was just them having you pay for them to clutter up your own facebook/google/instagram/podcast feed, nothing more, nothing less.
Most of the action in mortgage loan originating is keeping costs down. All of the money comes from Fannie Mae, it's just a matter of how many intermediaries and expense items are between the money and the borrower. Run thin, as thin as possible. Federal law says there has to be an LO, so I'm there no matter what. California law says my license must be hung with a California real estate broker (stupid) to be 1099 and broker mortgages, so that expense is also there no matter what. After that, as little middle management as possible is best. Use things that are turnkey and cost effective: $125/mo is my website, email server, loan application, document portal, calendar scheduling app, all the little pretty bells and whistles that consumers expect you to have, and then you gotta read a book a year ($25/yr) on SEO since that is always changing. $60/mo is the loan origination software. $60/mo is the interest rate comparison software that pulls rates from hundreds of lenders. Doesn't take much else - Sure, you gotta wear pants to work, so there's that.
Lender · Chicago, IL · Member since 2018 · 352 posts · 147 votes
7y
@Daniel Alvarez those rates are for owner occupied. So for a OO mine 15 y fix would be 3.875% with no points and INV at 4.625% no points. I don't understand though for a refi how do you get to choose if you want to do It as an OO or INV? The only time when you can refi your OO as INV is when you purchase an OO property and both those transactions are done at the same time
Rental Property Investor · Tysons Corner, VA · Member since 2016 · 51 posts · 13 votes
7y
@Diana Muresan We are coming back to VA in a couple months after a stint in Canada and deciding whether to move back into our old home (now rented) or find a new place. We may refinance it to get some equity out, so want to know how that would work. Am I correct assuming that if we move back in it would have to be refinanced as a OO and if not as INV?
Rental Property Investor · Tysons Corner, VA · Member since 2016 · 51 posts · 13 votes
7y
Wow this is spot on (and blew my mind to pieces!), thank you! It also helped me find this article, now that I know how to search for it (in case others come to this thread)
I closed on a loan this past Friday. I owned the SFR rental property free and clear. It was a commercial loan with a small 3 branch local bank. I borrowed $60k, 5.25%, 20 years, first 5 years fixed, possible negotiations for another 5 years fixed. Total Fees were $885.
I attempted to get the loan thru Quicken first. Fees/closing costs were $4500, plus they wanted to escrow my taxes, another $1500 up front.
The small bank commercial loan was a no brainer for me..
This looks like a solid alternative to a conventional, with greater flexibility, thanks for the tip
Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
7y
@Daniel Alvarez
The process was super easy. We gave him the financial info he wanted, they did a valuation of my property (not even an appraisal), and closed in a little over 3 weeks. I would definitely talk to some smaller banks. Good luck!