Compare Investment and Rental Home Rates
When most people think about a home loan, their mind goes to a mortgage meant to buy a primary residence. The person holding the mortgage is also the person living in the house. For lenders, this makes things nice and neat. The homeowner has a vested interest in staying in that house because they need a spot to live. That’s a pretty big motivator when it comes to making mortgage payments.
With an investment or rental property, things function a little bit differently. As a result, lenders handle these kinds of home loans in some specific ways.
If you’re thinking about buying a house to rent out or resell, you need to do two things. First, you need to understand how these loans work. Then, you need to compare rates to make sure you’re getting the best deal.
What is an investment property?
An investment property is a property you buy with the intention to either rent it out or resell it (and, ideally, make a profit in doing so). If you don’t plan to live in the property, this is the kind of mortgage you’ll need to get.
Generally, lenders have a cutoff in terms of how many units can be on the property. If it’s four or fewer, you should be able to get an investment property mortgage. If it’s five or more, you’ll probably need a commercial loan.
One more point of clarification: If you’re going to stay in the house even part of the year (e.g., use it as a vacation home), lenders might not see it as an investment property. Instead, you may be able to get what’s called a second-home mortgage. This can help you qualify for a slightly lower interest rate, so it’s an important distinction.
The pros and cons of investment/rental home loans
If you’re thinking about buying a house to rent out or resell, make sure you understand what that would mean for you.
Pros of a mortgage for an investment or rental home
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If you’re planning to rent the place out, a portion of the projected rent (e.g., 75%) can be counted toward your income. This matters because it lowers your debt-to-income (DTI) ratio, helping you qualify for a bigger loan or better terms.
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You can make money off an investment property, either in the form of a passive income stream from rent or by selling it for more money.
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Real estate tends to be a reliable investment, so putting your money there can be a solid way to build wealth. That’s particularly true if you buy in an area where property values appreciate.
Pros of a mortgage for an investment or rental home
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Because you won’t live at the property, you’ll be less affected if you default on the loan. Lenders consequently see investment property mortgages as higher risk, and charge a higher interest rate than for primary residences or even second homes.
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Due to that heightened risk, lenders are stricter with investment property loans. You’ll typically need to put at least 20% down and have a credit score of 700 or above, for example.
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If you’re going to be a landlord, managing tenant requests/demands, local regulation around rentals, and turnover when someone moves out can be a lot of work.
How to compare Investment Property Mortgage Rates mortgage rates
If you only take one piece of advice when you’re getting a mortgage, let it be this: compare rates from at least three different lenders. Doing so can save you thousands of dollars over the life of your loan.
To make it easier for you to put the work in here, follow these steps:
Step 1: Understand your borrower profile
First, you want to get a handle on how mortgage lenders are going to see you. If you look like you’re going to be able to repay your home loan fairly easily, they’ll offer you more favorable conditions. If you look high-risk, you’re going to pay more for your mortgage. Specifically, you’ll be charged a higher interest rate.
So, what makes a borrower low- or high-risk? To decide what kind of loan to offer to you (if any), lenders look at a lot of factors. The biggest ones here include:
- Your monthly income — you don’t want an overly large chunk to have to go toward paying your monthly mortgage bill, which lenders measure with your debt-to-income (DTI) ratio
- Your credit score, which essentially tells them how good you’ve been with managing money in the past
- Your loan-to-value (LTV) ratio (higher is riskier) — the price of the house and your down payment size both come into play here
If you’re not in good shape in any of these areas, putting in some work before you buy (e.g., working on your credit score, lowering your DTI ratio) can help you get a lower interest rate.
Step 2: Use rate tables to see what’s on offer today
There are lots of resources online that show you rate offers from leading lenders. Use a mortgage rate table to get a feel for what kind of interest rates are available from financial institutions that provide home loans in your area.
Ideally, that rate table lets you input personal information, like your credit score and the price of the house you want to buy. This way, the rates you get shown should align with what you’re actually eligible to get. A lot of lenders advertise low starting rates, but only the “best” borrowers will be approved for them once they apply.
Step 3: Get preapproved with three lenders
Once you’ve picked out a few lenders that look good to you, go through their preapproval process. That will mean filling out some paperwork, but it’s the best way to figure out what you can really qualify for in terms of loan size and interest rate.
Have financial documents — like your bank statement and pay stubs — handy to make it easier to complete your preapproval applications.
Step 4: Compare preapprovals
When you get preapproved, the lender should give you documentation about your potential mortgage. Ideally, this gives you a feel for the total amount you’re borrowing, the repayment term, the interest rate, fees, and closing costs.
Line up your quotes from each lender and go through them, paying special attention to the annual percentage rate (APR). This tells you how much you’ll pay each year for the loan including not just interest, but also fees. By looking at APRs, you get a clear idea of what you’ll truly pay if you choose that specific mortgage. This helps you identify the best option for yourself and your financial goals.
If you’re ready to start comparing Investment Property Mortgage Rates rates, use our rate table to get started. We have fields up top where you can input key details like your credit score range and zip code so we can best tailor the mortgage rate offers to you.