Income Property Financing
Mortgage rate on your real estate investment property
By
Apr 23, 2012, 15:48

A mortgage is a loan on your real estate investment property. Since your property is used as security to ensure that you will repay the money, it is important to understand your option. If you are not going to pay cash for your real estate property, you will be taking loan from a bank.

Single family homes are easiest to get a mortgage on. You may have difficulty getting a mortgage for condominiums and international investments, so again you should check on it before you go too far into your planning. There are on line mortgage calculators you can use to calculate your monthly mortgage payments.

Before you make an offer on a real estate property you should be pre-approved for the loan. This not only provides you peace of mind but also makes your offer better. In fact in most cases the seller would like to see such a pre-approval before they even look at your offer.

In terms of loan amount, you have three choices. A conventional mortgage loan does not exceed 80 percent of the home price. A high-ratio mortgage is a loan that is above 80 percent but below 95 percent of the purchase price of the house. High-ratio mortgages must be insured against loss, and the insurance premium is added to the loan price. Another option for financing up to 95 percent of purchase price is to get two mortgage loans. The first mortgage lender has the right to the property in case of default. The second lender therefore charges a high interest rate due to higher risk.

Let’s look at the mechanics of a mortgage. In a fixed term mortgage, the interest rate is fixed for the duration of the loan. In an adjustable rate mortgage (ARM) there is a lot of flexibility where rates can be adjusted on a monthly basis. There is also the option of multiple term mortgages where the loan is customized such as adjustable for three years and fixed for ten years. You can split the entire duration of loan into five parts. This is for the more hands-on people who keep an eye on interest rate fluctuations. Another option is the 6-month convertible mortgage when interest rates are going down. You can have the option of six months at fixed payment and then have the advantage of converting the loan to a longer-term, less-risky loan. Considering how low mortgage rates are in today’s market, a fixed-term mortgage is the best way to go about getting your real estate property financed.

You need to also ensure that the mortgage you are taking has no pre-payment penalty. When you take the loan, you may take it for thirty year fixed period but later decide to pay it off in let’s say twenty years. In such a scenario, you do not want to pay any pre-payment penalty.

Rule of Thumb: Do not listen to those who tell you to put zero down payment. This may seem like a lucrative option but you know there is no such thing as a free lunch. In this case, you pay the price by having a higher mortgage rate. Always aim to have a 20 percent down payment in cash to get the best deal possible on your mortgage rate.

My advice is to prepare to put at least 20 percent down and get pre-approved for fifteen years or thirty year fixed mortgage. Remember that fifteen year loan has a higher monthly payment (since a much higher amount is going towards the principal) than a thirty year fixed loan. Run the numbers to make sure you are comfortable with the fifteen year loan. If not ten go for thirty year fixed. You can always make additional principal payments during the life of the loan.

Why make 20 percent down payment

You may ask, why should I put 20 percent down, shouldn’t I leverage with a smaller down payment? The answer is yes you can do that and it may be an option if you do not have enough cash for 20 percent down payment. Although I would advise you not to invest in real estate if you do not currently have 20 percent down payment and wait till you have it. You get the best rate with lowest costs when you put at least 20 percent down payment and have good credit scores.

When we started in investing in real estate we had 20 percent down payment, but our mortgage broker at that time advised us that since we were getting the property at a good price based upon appraised value, we should only pay 10 percent down. Since our down payment was less than 20 percent, we had to make PMI (private mortgage insurance) payments, which was about $100 per month. He said that after six months the PMI could be waived by the mortgage company since our loan to value would e less than 80 percent. Since we were just starting off, we took the advice and put 10 percent down. Six months later when we called our broker, he said to call the mortgage company directly to have the PMI waived. We called the mortgage company and they told us they would only waive the PMI if our loan to value was 65 percent or less and that we would need to get an appraisal done (which costs about $400). We knew that were not yet at 65 percent and luckily since interest rates had come down we refinanced with additional down payment to have 20% down and no PMI. You must have guessed it – we did not use our original mortgage broker to do our refinancing.

Mortgage rate for investment properties

You need to be aware that mortgage rates for your primary home and your investment properties are going to be different. The mortgage rates for investment properties are generally higher than those of your primary home. These rates are going to be about three-quarter percent higher than those of your primary homes. In some cases where you could qualify a real estate property as your second home, you could get a lower mortgage rate but for all other properties, the mortgage rates are going to be higher. There are very strict guidelines on what qualifies as second home so before you decide to do that, be extra cautious. Our need to be able to show that you are living in that home for a certain length of time each year. Unless, you truly are doing that, it is safer to qualify it as an investment property.