If you’re new to investing in rental properties, you may be surprised by the high rental property interest rates on your investment property loan. The average interest rate on a rental property is much higher than many expect.
When a property is not an owner’s primary residence, banks consider the loan a higher risk. For this reason, they increase the interest rate on rental properties, making them more expensive for investors.
If you’re considering getting a loan for a rental property, you need to know how rental property interest rates work and how to get the lowest interest rate possible.
How Do Mortgage Interest Rates for Rental Property Work?
When a bank or a lender considers a loan for an investment property, they have to evaluate how much risk is involved. The reality is that loans for rental properties are riskier than primary residences.
This is because rental properties can experience periods of vacancy, meaning there is no rent coming in for one or several units. When this happens, it increases the possibility of the owner defaulting on their mortgage.
The logic here is that in times of trouble the owner will choose to make mortgage payments on their primary residence before their investment property. This higher risk causes lenders to raise their interest rates.
On average, investment property interest rates run about 50 to 88 points higher than the interest rate on a primary residence.
The interest rate on a primary residence might be 3.25 percent, but if that same property will serve as a rental the rate might increase to between 3.75 and 4.125 percent.
How to Lower Your Average Interest Rate on a Rental Property?
Although rental property interest rates are intentionally higher than average, there are ways to reduce yours. Having good credit, lowering your debt, and having a lot of cash on hand are not the only options, either!
Compare Lenders
Shopping around and comparing lenders is a good idea regardless of what interest rate you’re hoping to get. No two lenders are going to offer you the same quote on an investment property interest rate.
Most loan programs vary broadly. They have different requirements for qualification as well. Your best strategy is to get at least five different mortgage quotes before deciding on a lender.
Make a Big Down Payment:
The more money you can put down, the less you need to borrow. Therefore, the risk to your lender decreases. The less risk that is involved on the lender’s end, the better the interest rate they can offer.
If you are able to put down more than the minimum timely payment, you will be able to save on interest. As a general rule, if you can put down at least 20 to 25 percent, you can reduce your interest rate.
Improve Your Credit Score:
If your credit score is below 640, you will not qualify for a rental property mortgage loan. If you can get your credit score up to 700 or even higher, you will be able to get a much better interest rate.
Inhabit One of the Units:
In the event you are purchasing a property with multiple units, consider living in one of them. This is a house hack that can enable you to get a conventional loan on an investment property.
By inhabiting one of the units, you can also qualify for FHA loans. These have a lower threshold on credit score requirements and offer lower interest rates.
Rental Property Interest Rates Today:
Rental property interest rates are notoriously higher than average. This is due to the higher risk the lending company or bank takes on with investment properties.
You can lower your rental property interest rate by making a large downpayment, improving your credit score, and comparing at least five mortgage quotes.
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