Investing in real estate can be a smart financial decision, but it requires a significant amount of capital. Most people require a mortgage to purchase an investment property, but these mortgages are more expensive and have stricter requirements than primary residence loans. In this comprehensive guide, we will provide you with everything you need to know about investment property mortgage rates.
Mortgage Rates for Investment Properties
A mortgage rate is the interest rate you pay on the money you borrow to buy property. Mortgage rates for investment properties are typically higher than rates for primary residences. This is because investment properties are considered riskier by lenders.
The interest rate you receive on an investment property mortgage is determined by several factors, including your credit score, the loan-to-value ratio, and the property's location and condition. Generally, you can expect to pay between 0.5% and 1.5% more for an investment property mortgage than a primary residence mortgage.
Types of Investment Property Mortgages
There are several types of investment property mortgages, including conventional loans, government-backed loans, and portfolio loans. Conventional loans are the most common type of investment property mortgage and are offered by banks and other financial institutions. Government-backed loans, such as FHA and VA loans, are also available for investment properties.
Portfolio loans are another option for investors. These loans are offered by private lenders and are not sold to investors like traditional mortgages. Portfolio lenders are more flexible with their underwriting standards and may be a good option for investors who do not meet the requirements for conventional or government-backed loans.
Mortgage Rate Locks
A mortgage rate lock is an agreement between you and your lender that guarantees a specific interest rate for a certain period, usually 30 to 60 days. Mortgage rate locks can be especially important for investment properties, as rates can fluctuate rapidly.
According to the Mortgage Bankers Association, mortgage rate locks for second homes and investment properties were down 52% from pre-pandemic levels on a seasonally adjusted basis in 2020. This means that investors who did not lock in their rates may have missed out on lower interest rates.
Factors that Affect Investment Property Mortgage Rates
Several factors can affect investment property mortgage rates, including:
Credit score: A higher credit score will typically result in a lower interest rate.
Loan-to-value ratio: The loan-to-value ratio is the amount of the loan compared to the property's value. A lower loan-to-value ratio will typically result in a lower interest rate.
Property location: Properties in desirable locations may have lower interest rates.
Property condition: Properties in good condition may have lower interest rates.
Type of mortgage: Different types of mortgages come with different interest rates.
Investment Property Mortgage Rates vs. Primary Residence Mortgage Rates
Investment property mortgage rates are typically higher than primary residence mortgage rates. This is because investment properties are considered riskier by lenders. Additionally, investment properties do not qualify for certain government-backed loan programs that are available for primary residences.
As of July 2021, the average interest rate for a 30-year fixed-rate mortgage on an investment property was around 4.25%, while the average interest rate for a primary residence was around 3.25%.
How to Get the Best Investment Property Mortgage Rates
To get the best investment property mortgage rates, you should:
Improve your credit score: A higher credit score can result in a lower interest rate.
Save for a larger down payment: A larger down payment can result in a lower interest rate.
Shop around: Compare rates from multiple lenders to find the best deal.
Consider different types of mortgages: Conventional, government-backed, and portfolio loans all have different interest rates and requirements.
Investment Property Mortgage Rates in Singapore
Despite months of dwindling housing supply and an influx of foreign buyers and investors, Singapore home sales climbed to a six-month high in June 2021. The median price for non-landed private homes increased by 1.2% month-on-month to SGD 1.63 million ($1.2 million).
Investors in Singapore can expect to pay higher interest rates for investment property mortgages than for primary residence mortgages. As of July 2021, the average interest rate for a 30-year fixed-rate mortgage on an investment property in Singapore was around 2.5%, while the average interest rate for a primary residence was around 1.5%.
REITs and Investment Properties
REITs, or real estate investment trusts, are another way to invest in real estate without owning physical property. REITs are companies that own and operate income-producing real estate, such as office buildings, shopping malls, and hotels. Investors can buy shares in a REIT and receive a portion of the rental income generated by the properties.
REITs provide diversification and a recurring income source for investors. However, they do not offer the same potential for capital appreciation as owning physical property.
Refinancing Investment Properties
Refinancing is a way to replace your current mortgage with a new one that has better terms, such as a lower interest rate or shorter loan term. Refinancing can be a good option for investors who want to lower their monthly payments or free up equity in their properties.
Refinancing is available for investment properties, just like primary residences. However, the requirements for investment property refinancing are typically stricter than for primary residences. You may need to have a higher credit score and a lower loan-to-value ratio to qualify for an investment property refinance.
Investment property mortgage rates are higher and have stricter requirements than primary residence mortgages. However, investing in real estate can be a smart financial decision if done correctly. By following the tips outlined in this guide, you can secure the best investment property mortgage rates and make a wise investment decision.