Are These Interest Rates Especially High?

53 Replies

I’m grateful for any insights folks can provide on current interest rates for an investment property. Do the following rates (issued in the past few days) seem especially high:

For a single family rental home:

+200,000 purchase price, 25% down, 30yr 5.25% apr 5.379

+175,000 purchase price, 25% down 30 yr fixed 5.25% apr 5.3895

+150,000 purchase price, 25% down 30yr fixed 5.375% apr 5.55

+125,000 purchase price, 25% down 30 yr fixed 5.375% apr 5.57

For a multi-family (of two to four units):

+250,000 purchase price, 25% down 30 yr fixed 5.5% apr 5.918

+225,000 purchase price, 25% down 30 yr fixed 5.5% apr 5.603

+200,000 purchase price, 30yr fixed 5.5% rate apr 5.918

We were recently pre-approved and when I ultimately drilled down into the current rates our mortgage advisor could offer, this is what we were quoted.

I realize it's only possibly to speak in generalities without having a complete financial picture, but here's a snapshot: my wife and I are applying together and each have credit scores of approximately 800, very low DTI, and strong income/employment histories for the price range of properties we're considering. This loan would be for our first investment property, which we aim to purchase in Spokane, Washington (99205, 99224, 99201, 99203, etc.).

I realize that we should expect higher interest rates compared to someone who is purchasing their primary residence (perhaps 1% for an SFR and up to 1.2% for a multi-family), but I was definitely surprised by these rates—should I be? If so, what would you expect a reasonable rate to be for SFRs in the above price ranges?

Lastly, should I expect most lenders to require 25% down rather than 20% down for an investment property?

Thanks so much for your insights and assistance.

I’ve seen non-owner occupied rates lately around 4.25 to 4.5.  I heard it was about 3/4 higher than owner-occupied (used to be only 0.5% higher).  Obviously that depends on your credit too.

Hi Mike,
So this depends on alot of things for sure. But in my opinion it does seem high. We recently bought a Triplex in Spokane with a rate of 4.625% and that was with a less than stellar DTI since only my wife has a W2 Job (I work for myself).

What lender were these from? Have you shopped around at all?

For your last question, 25% down is standard for an investment property.

Originally posted by @Mike S. :

I’m grateful for any insights folks can provide on current interest rates for an investment property. Do the following rates (issued in the past few days) seem especially high:

For a single family rental home:

+200,000 purchase price, 25% down, 30yr 5.25% apr 5.379

+175,000 purchase price, 25% down 30 yr fixed 5.25% apr 5.3895

+150,000 purchase price, 25% down 30yr fixed 5.375% apr 5.55

+125,000 purchase price, 25% down 30 yr fixed 5.375% apr 5.57

For a multi-family (of two to four units):

+250,000 purchase price, 25% down 30 yr fixed 5.5% apr 5.918

+225,000 purchase price, 25% down 30 yr fixed 5.5% apr 5.603

+200,000 purchase price, 30yr fixed 5.5% rate apr 5.918

We were recently pre-approved and when I ultimately drilled down into the current rates our mortgage advisor could offer, this is what we were quoted.

I realize it's only possibly to speak in generalities without having a complete financial picture, but here's a snapshot: my wife and I are applying together and each have credit scores of approximately 800, very low DTI, and strong income/employment histories for the price range of properties we're considering. This loan would be for our first investment property, which we aim to purchase in Spokane, Washington (99205, 99224, 99201, 99203, etc.).

I realize that we should expect higher interest rates compared to someone who is purchasing their primary residence (perhaps 1% for an SFR and up to 1.2% for a multi-family), but I was definitely surprised by these rates—should I be? If so, what would you expect a reasonable rate to be for SFRs in the above price ranges?

Lastly, should I expect most lenders to require 25% down rather than 20% down for an investment property?

Thanks so much for your insights and assistance.

 If you care about the rate, yes you will put 25% down.

It's not possible to comment on the exact pricing available to you without far more information than provided, but one thing to keep in mind right now is that with most lenders, their discount point buydowns have significantly more bang for your buck than normal.

If you google, a million websites will tell you that 1 point buys the rate down 0.25%. Right now, it's closer to 0.5%. Break even points are less than 4 years, typically, at the moment. I've seen a few scenarios where the break even is less than 2 years. It looks like rates have fallen to the point that lenders are no longer interested in competing on rate, rather they are competing on discount point buydowns. 

Right now lenders are trying to hedge against you refinancing before they've recouped their origination costs by collecting several months of interest payments. That's what you are seeing. The stick of a higher "no points" interest rate, the carrot of phenomenal buydowns. 

Since many consumers are going along with this and buying the rate down, you are continuing to see the average rates people get decrease even though the "no points" rates have slowed their rate of change substantially. 

Is it worth going into that level of detail with an audience of 1 person who isn't even in contract and in a position to lock or make a decision? Up to the LO. 

@Jared Boundy  Thanks for your insights. Indeed, the rates you quoted are definitely more inline with what I was expecting and have been using to evaluate most properties. They're also in tune with what I've seen a few others cite as the rates they've secured with a similar profile.

@Michael DeHaan Congrats on recently closing on your triplex. Thanks for sharing the rate you were able to attain. May I ask what lender you ultimately selected? These quotes were from Cornerstone. I'll definitely be shopping around on the heels of these quotes. I value excellent service (one of the things that initially attracted me to Cornerstone) and understand it can come at a price, but the quoted rates definitely change the game for some properties.

@Chris Mason This is incredibly helpful--thank you. I haven't explored rate buy-downs and your comments definitely open my eyes with regards to the opportunity currently on the table with them. I greatly appreciate it.

@Mike S. For that triplex purchase we got a conventional 30 year fixed loan from Better Mortgage. We also shopped around and found similar deals which we used lower our closing costs by almost 10k by having the lenders compete for our business. It can be a bit time consuming to do that, but hey to keep that much cash from going to closing costs it was totally worth it. 

I have used Better for a few loans now and have found they have great customer service and their online portal is really easy to use compared to other lenders I have worked with. Plus they have a pretty solid low price guarantee where if for some reason they arent the cheapest and you close with another lender who is cheaper than them, they will give you $1000. Only thing with them is they are open that they WILL sell your mortgage. Some people care that much but it doesn't phase me much.

@Michael DeHaan Thanks a ton for the insights on Better Mortgage and how you were able to lower your closing costs by leveraging the competing offers. This is great--I'll be sure to include them in the running. It sounds like they have a lot to offer--both with regards to service and pricing. Have you been able to work with the same loan officer/broker with each subsequent loan with Better? If not, have you found this to be a moot detail given their strong customer service? I greatly appreciate your time and insights.

@Mike S. To get better rates you basically just show them the offer you got from someone else and ask if they can beat it. 

Ex: I applied for a mortgage from Lender A and Lender B. Lender A says 4.5% rate and 12k in closing costs, Lender B says 4.375% rate and and 11k closing costs. You can go back to Lender A and say "Hey! I really like you, but Lender B gave me these better terms" Ideally Lender A will come back with a better off, say 4.375 and 10k closing costs. You then go back to Lender B and say "Hey, Lender A just gave me this! What can you do?" Rinse and repeat until one of them says "Ya I cant beat that." Some people may think thats slimy I suppose, but on our triplex our cash to close started at just over 100k and by the end of that was close to 89k. Significant savings for sure.

I worked with a different team every time, it didnt have a bearing on much. The second time the underwriter we had was a bit more picky, but that can happen with any lender. Cost savings aside, the main thing I liked about them was that even though we had some extensive underwriting, the contact we worked with directly was super nice and extremely helpful figuring things out. I have worked with more traditional banks in the past and our contact would almost seem to get agitated and make me feel like I had done something wrong and was causing them a great burden.

Mike - these rates look right to me and fall in the middle of the range we typically offer. You'd likely be in the low 5's or high 4's if your LTV was lower. Not all lenders require 25% down either; 20% is available.

We just refinanced out duplex into an FHA at 4.125%.

We’re about to buy an investment duplex at 3.125%

My brother just bought his SFH at 3.8%

Personally, anything above 5% is too high for this market we’re in. If you’re offered 5%, go to another lender and get a lower rate.

@Mike S.

Those rates do seem on the high side. I like to still run my numbers on new purchases staying on the conservative side so it leaves a little room for the unexpected. If you are buying commercial property, you may need to put up to 30% down on your first property. For me they required 27%

@Caitlin Waldschmidt  Thanks—I greatly appreciate your insights as a lender and hearing the fact that these rates are in line with what you’re seeing. It’s also a good reminder to look beyond my confirmation bias. When soliciting feedback, it can be so easy to focus on the facts that support one’s own preconceptions so it’s good to hear the opposite perspective—that perhaps I should not be so surprised by these rates. Thank you, also, for your insights on the availability of 20% vs. 25% down payments. From your experience, can you provide any general ballpark rules on how much higher interest rates will be with only a 20% down payment vs. a 25% down payment for a residential investment property?

@Steven Wilson —Congrats on the refinance and new purchase and thanks for the insights on the rates you’ve obtained. I appreciate your sentiments on 5% serving as a bit of a personal benchmark for what's currently acceptable. Prior to receiving these quotes, I had more or less adopted the same benchmark (and viewed it as a conservative number for evaluating properties). Needless to say, I was taken aback to see rates closer to 5.5% and beyond.

@Jeff Stein —Thanks for your insights and sharing your experience with the size of commercial down payments. I share your belief in being conservative with all estimates—indeed it’s a great way to “leave a little room for the unexpected.”

@Nic Stergion —Congrats on your upcoming closing and thanks for sharing your rate. That rate is definitely more in line with what I was hoping to find. If you don’t mind me asking, was that rate with 20% down? And did you have to pay for the float down protection?

Originally posted by @Steven Wilson :

We just refinanced out duplex into an FHA at 4.125%.

We’re about to buy an investment duplex at 3.125%

My brother just bought his SFH at 3.8%

Personally, anything above 5% is too high for this market we’re in. If you’re offered 5%, go to another lender and get a lower rate.

apples to oranges those are owner occ rates NOT NON owner occ rates.. 

 

@Jay Hinrichs Thanks for pointing that out. Indeed, that's a crucial detail. As always, I'm incredibly grateful when you share your wisdom and experience. I've also found comfort in knowing you have faith in Spokane's long-term prospects, as evident in some of your other posts. Thanks again!

@Steven Wilson Just to clarify, will you be living in part of the duplex you purchased as an investment?

@Jay Hinrichs The Investment duplex is a non owner occupied and it is offered at 3.125%

My wife and I shopped 5 mortgage lenders, the first couple told us investment loans would be in the mid 5's. But we went to a local credit union and found a gem of low 3's.

Originally posted by @Steven Wilson :

@Jay Hinrichs The Investment duplex is a non owner occupied and it is offered at 3.125%

My wife and I shopped 5 mortgage lenders, the first couple told us investment loans would be in the mid 5's. But we went to a local credit union and found a gem of low 3's.

yup Gem is right that one frankly is hard to believe.. but if you say so.. there is no way that kind of loan product is available in our market whats the acutal APR ? rate is one thing APR is another to give complete comparisions..

 

@Mike S. No Mike. The duplex we are about to purchase will be occupied by tenants. We will not be living there. 

My advice is to vet and "interview" at least 3 lenders. They will all tell you different things and different rates. This is especially true if you do a portfolio loan (a loan that does not fall into Freddie mac or Fannie Mae lending) Then the institution has more freedom with the loan and rates.

Originally posted by @Steven Wilson :

@Jay Hinrichs the APR is coming in at 4.05%, which is still lower then what I was offered by the other institutions.

NO kidding..  are your credit unions like ours.. the property and the borrower have to live in their foot print ?? 

I know our local credit unions have the best rates for auto loans.. but on real estate they follow the herd as they sell their loans off like most all other lenders. 

 

@Jay Hinrichs I was just as surprised! We have never had a relationship with this credit union before coming to them for this loan.

But alas, we don't close until Sep 16th. And if Ive learned anything, its don't count your chickens till they hatch. Its a GREAT loan product, but we haven't closed just yet.

Originally posted by @Steven Wilson :

@Jay Hinrichs I was just as surprised! We have never had a relationship with this credit union before coming to them for this loan.

But alas, we don't close until Sep 16th. And if Ive learned anything, its don't count your chickens till they hatch. Its a GREAT loan product, but we haven't closed just yet.

is the property in their foot print  (lending footprint) and do you personally reside in their lending footprint.. those are the requirements for our Oregon credit unions..  and it can come down to what section of town you even live in.. their foot prints in our state can be quite small 

 

@Steven Wilson Thanks for the clarification. Like @Jay Hinrichs , I'm curious if you had to reside in the credit union's footprint to be eligible for such a great rate. And thanks for the advice on interviewing and vetting lenders, as well as on the flexibility afforded by those offering portfolio loans. I've often heard that in the abstract about portfolio loans/lenders--it's great to see that via your personal experiences and the rate you were able to attain.

Best of luck with the closing. Cheers to smooth sailing through September 16th and beyond!

Originally posted by @Steven Wilson :

@Jay Hinrichs We are both located in the same foot print (that is if the same city is in the footprint) but we are in two different parts of town.

Gothca be interesting to see if your C U operate the same way.. in other words some out of state investor wants the same deal you got maybe when you talk to your loan officer you can ask them.. I would be curious to know. 

 

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