How to Get the Best Rate on Your Rental Property Mortgage

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Want the best interest rate on your next rental property purchase? Here’’ how to get it.

Interest rates are generally higher on investment property loans. If a lender knows a home’s not your primary residence, it sends up the red flag: Risk!

When you look at it from the bank’s perspective, it’s no wonder. Real estate investors are simply more likely to default. If faced with financial struggles, an investor is more likely to focus on keeping their main home. Their rental properties? Those they can cut and run from.

Lenders account for this extra risk by bumping up the interest rate, making loans generally more expensive for investors. Fortunately, you don’t have to take it lying down. Are you applying for an investment or rental property mortgage soon? Here’s what you can do to get a better rate.

Consider staying in one of the units

If you’re buying a multi-unit property, think about using one of the units as your primary residence if possible. With this strategy — often called house hacking — you can not only get lower rates on conventional loans, but you can also qualify for other loan programs, too — namely FHA loans.

FHA loans have lower credit score requirements than other mortgages, and down payments can be as low as 3.5%. Throw in the low rates they come with, and this strategy could save you a pretty penny both up front and in the long run. (Just don’t forget about mortgage insurance.)

Make a big down payment

The more money you put down, the less the lender has on the line and the better interest rates they can offer you. Generally speaking, you’ll need at least 20% to 25% for an investment property down payment, but if you can go higher than that, you’ll save significantly on interest.

If you don’t have much cash, think about using your other properties (or your primary residence) as a resource. A cash-out refinance, home equity loan, or HELOC can help you tap the equity in those properties, and you can use that cash to boost your down payment. But make sure the math works out in your favor — meaning the interest you’re paying on the refi or equity loan won’t outweigh your rate savings.

Work on your credit

Credit — particularly your credit score — plays a huge role in what interest rates you get, whether it’s for a rental property loan, traditional mortgage, or even a car loan. Typically, the absolute lowest rates go to borrowers in the 740 to 850 range, but the higher your score is, the better.

If you know you’ll be buying a rental property in the near future, take time to pull your credit score and full credit report. If your score is lower than the 740 threshold, look to your report for areas of improvement. Settle up any late payments, report any errors to the credit bureaus, and start paying down your high-balance debts. Asking for a credit line increase can help, too (as long as you don’t increase your balance at the same time.)

Have lots in cash reserves

Being flush with cash is a great way to reduce the risk you pose to lenders. If you have a well-stocked savings account, lenders know you can pick up the slack should your income slow. You’ll be less likely to struggle to make payments or fall behind on your loan.

In most cases, lenders require investors to have cash reserves to cover at least six months of the new mortgage payment, including taxes, insurance, and interest. If you can double that and have at least a full year of payments on hand, you’ll get the best rates possible.

Shop around for your lender

No two lenders are created equal. In fact, most vary widely in their loan programs, qualifying requirements, and, most importantly, interest rates, so it’s vital to shop around before choosing where to apply.

According to Freddie Mac, getting just five mortgage quotes can save you a whopping $3,000. So make sure to contact at least three to five lenders and get loan estimates from each. You’ll want to compare both rates and fees, as well as their long-term costs.

The bottom line

Interest rates are typically higher for investors than they are for traditional home buyers, but that’s not set in stone. Work on your credit, boost those cash reserves, and consider staying in one of your property’s units — and you might get a lower rate than you think.