Purchasing an investment property, which is also known as a rental property or income property, is one of the effective ways to gain passive income and long-term wealth.
Just like any other types of investment, buying and owning this kind of property also has some risks. And the requirements to finance it are quite different compared to a primary residence. Mortgage rates on investment property are higher than residential property. Why?
What are Investment Property Mortgage Rates?
Investment property mortgage rates are the interest rates that the lender charges for an investment property loan.
The mortgage rate you will get depends on several factors, including your financial profile, credit, and the amount of your down payment.
Generally, the higher your credit score and the more down payment you submit, the better the rate you will get. So, how much is the minimum down payment for an investment property loan?
Most mortgage lenders require at least 15 percent to 20 percent for the minimum down payment of an investment property loan. But some others require a minimum down payment of 25 percent.
Benefits and Drawbacks of Investment Property Loans
Just like other things, investment property mortgages also have pros and cons. Applying for an investment property loan is suitable for you who are not planning to live in the property. Such a loan allows you to borrow more than a conventional loan.
Moreover, you can reduce interest as a rental expense. You can also reduce depreciation as well. However, investment property loans also have drawbacks that you have to consider.
As it is said before, property investment mortgage rates are higher than the conventional mortgage rates.
This is probably the biggest drawback of an investment property loan. Another drawback is you will have to meet stricter underwriting requirements.
Why are Interest Rates Higher on Investment Properties?
Mortgage rates investment property are higher than conventional ones because the former has more risks.
Property investors usually rent out their investment properties to gain rental income. Periods of vacancy can increase the possibility of mortgage default if the investor is not financially prepared.
After all, they would want to cover the mortgage payment on their residential home first. When times get hard, owners of investment property can cut their loss and run.
So, in order to protect themselves from the risk, mortgage lenders tend to charge a higher interest rate and apply stricter requirements.