Own an investment property? Thinking about buying a property for income producing purposes? It’s going to cost….

For years, Fannie Mae and Freddie Mac have charged premiums for individuals purchasing property for the purposes of generating income than for primary residence homes and rightfully so, higher the risk, higher the cost. Conversely, opposite holds true, lower the risk the lower the cost. In mortgage finance perception creates reality for the bondholders holding these securities tied to homes, not occupied by the owners of record.

A mortgage banking institution looks at an investment property in the following way “In a foreclosure situation, which property is he more than likely going to give up, his primary home or the investment property?”  This is the sole reason why investment property financing costs more. Investors understand there is always a degree of risk associated with an opportunity. Because the emotional concerns are not as prevalent as they are when buying a primary residence, transaction becomes more of a data driven decision. This precisely why weight is given to the higher probability an investor would be more willing to lose an income property over a primary home.

How Much More Are Investment Property Mortgage Rates?

This does a vary based on daily market fluctuation, but generally expect investment property financing to be at least .5% higher in rate when compared to primary home financing.

In mortgage finance there is pricing adjusters which are “assessments of risk” added to a loan that have the ability to change the structure, and/or associated fees.

Typical loan pricing adjusters that affect interest rate:

• Occupancy i.e. investment property
• Credit score
• Loan-to-value
• Loan program
• Property type single-family residence, multi-family etc.

The biggest pricing adjuster is occupancy, the adjustment is 1.75% of the loan amount. That’s right, in every investment property financing scenario, this figure is always accounted for.

In other words, a lender prices a mortgage by raising or lowering the interest rate based on any applicable adjusters like loan-to-value and credit score in addition to property occupancy. Let’s say for example, a consumer desires to pay the upfront overhead premium to generate a lower rate of interest. Assuming this individual had excellent credit and extremely low loan-to-value such as 60% or lower, they would pay pay 1.75% of  the loan amount in the form of discount points to secure that rate. Want to avoid the premium? Take a higher interest rate and the lender can absorb this percentage by raising interest rate upwards of at least .5%.

Common Credit Characteristics Of Investment Property Loans