Understanding Mortgage Rates On Investment Properties

Securing an investment property can greatly increase your net worth and provide you with long-term rental income. However, before you offer a property, it’s important to understand the current mortgage rates available. Many first time buyers need help determining the best rates for properties they are considering. Here’s what you need to know to help determine which mortgage is best for your situation.

What Is A Mortgage Rate?

In simple terms, a mortgage rate is the amount of interest paid over the life of a loan. The higher the rate, the more money a borrower pays interest charges. Each lender has a slightly different way of calculating their rates; it is important to understand how these rates are determined. 

The interest rate is often listed as “Annual Percentage Rate” or APR. This is the percentage rate that you will pay annually for the life of the loan. When looking at mortgage rates, it is important to compare the interest rate to the APR. Investment property mortgage rates are higher for investment properties than home mortgages because the investor does not live in the home. Loan companies view this additional risk as justification for a higher mortgage rate.

Factors That Determine Mortgage Rates

While mortgage rates tend to fluctuate fairly regularly, there are several factors that can influence the rate that you qualify for. First, your credit score is an important consideration. You are unlikely to qualify for a high mortgage rate if you have a low credit score. Second, the location of your property can also affect the type of mortgage you receive.

 For example, if you are purchasing a property in a neighborhood where values are expected to rise in the next few years, your mortgage lender will likely offer you a lower interest rate than they would for a property located in a declining market.

 Lastly, your monthly housing costs will impact the type of mortgage you will receive. If you are only paying a small amount of money each month toward your mortgage, you may be offered a lower rate than one in which you pay a significant amount toward the principal each month.

Understanding Current Interest Rates

Interest rates can vary significantly from one lender to the next, so it is important to shop around to find the best deal for your situation. There are several websites where you can search and compare current mortgage rates in your area. Once you find a lender that offers competitive rates, you should meet with a representative to discuss your financing options and ask any questions you may have. It is important to remember that mortgage rates change on a regular basis, so you should be prepared to repeat the process in order to find the best rate for your situation.

Factor in closing costs when calculating the cost of your home.

The lender will typically charge several fees as part of your closing costs, including underwriting, processing, escrow, settlement, and application fees. These fees can add significant expense to your overall cost and should be noticed when evaluating your loan options. However, they can be avoided by applying for a loan that requires no points or by paying points to lower the interest rate on your loan. Consider taking out a home equity loan or line of credit to cover the cost of your mortgage, as these options tend to have much lower closing costs than a traditional mortgage loan.

Mortgage insurance can protect you against the risk of default on the loan.

If you fail to make mortgage payments on your home loan, the lender can foreclose on your home to recoup their losses. Unfortunately, this process is costly and time consuming for the lender, and it is not uncommon for them to lose money on a house when it is foreclosed upon. To prevent these losses, most lenders will require you to purchase mortgage insurance. This coverage protects the lender in the event that the borrower defaults on the loan, but it typically costs borrowers significantly more than traditional loans due to the additional risk they are taking on.

Conclusion

If you are interested in buying a home or refinancing your current mortgage, it is important to understand the mortgage application process and the various types of mortgages available. By taking the time to carefully research your options, you will be better able to identify a mortgage that is best for you and eliminate unnecessary expenses in the process.