Are you thinking of investing in rental properties in Texas but worried about the mortgage rates? You're not alone. Many people are intimidated by the idea of investing in rental properties because of the financial commitments that come with it. One of the biggest concerns is the rental property mortgage rate.
Before you dive into the sometimes deep waters of owning a rental property, let’s address all your burning questions: how much more you can expect to pay for a rental property mortgage rate in Texas, why there is a difference, who sets the rates, rental property down payments, and how to get a lower rental property mortgage rate.
Investment Property Rates vs. Standard Mortgage Rates
Before we dive into the details, it's essential to understand the difference between investment property rates and standard mortgage rates. Standard mortgage rates are the rates you get when you buy a primary residence.
Investment property rates, on the other hand, are the rates you get when you buy a property to rent out to others. Investment property rates are usually higher than standard mortgage rates, and they can vary depending on several factors.
How Much More Do You Pay For A Rental Property Mortgage Rate In Texas?
You can expect to pay anywhere from 0.5% to 0.875% more for a rental property mortgage rate as compared to a primary residence rate. But why? And what can you do about it? That’s a bit more nuanced.
Why is There a Difference?
The main reason why investment property rates are higher than standard mortgage rates is that they are considered riskier for lenders. When you buy an investment property, you are essentially running a business. You need to have tenants in your property to generate income, and if you don't, you could be stuck with a mortgage payment that you can't afford.
And if you’ve got your home mortgage and your rental property mortgage with only enough money to pay for one, which would you choose? Exactly!
In fact, the University of Pennsylvania’s Wharton School of Business published a paper proving just that - rental property owners will ditch their properties if the investment isn’t working out. And this makes investment properties riskier for lenders, and they charge higher rates to compensate for the risk.
Who Sets the Rates?
Fannie and Freddie set the guidelines for most mortgages in the U.s. And they charge higher fees on rental property mortgage transactions because of the risk mentioned above. Those fees trickle down to the lenders, who set the rates for rental property mortgages.
Some lenders specialize in investment property mortgages and offer more competitive rates, while others may charge higher rates. It's essential to shop around and compare rates from different lenders to find the best deal.
Rental Property Down Payments
Another factor that affects the mortgage rate for rental properties is the down payment. Generally, lenders require a larger down payment for rental properties than for primary residences. The reason for this is that the lender wants to ensure that the borrower has enough skin in the game and is less likely to default on the loan.
A larger down payment also reduces the lender's risk and can lead to lower interest rates. Thus, if you’re purchasing a rental property, you should plan to put at least 25% down.
How to Get a Lower Rental Property Mortgage Rate
While rental property mortgage rates are typically higher than standard mortgage rates, there are ways to get a lower rate. Here are some tips:
Improve your credit score
A higher credit score can help you nab lower interest rates. Make sure to pay your bills on time and keep your credit utilization low.
Consider a shorter loan term
Shorter loan terms typically come with lower interest rates. While your monthly payments may be higher, you could save money in the long run.
Make a larger down payment
As we mentioned earlier, a larger down payment can lead to a lower interest rate by showing increased commitment and solvency.
Work with an experienced mortgage lender
A mortgage lender like Texas United Mortgage can help you find the best rates and terms for your rental property mortgage. They can negotiate on your behalf and walk you through the process, using their experience and local knowledge.
Rental property mortgage rates in Texas are typically higher than standard mortgage rates. But that doesn’t mean it’s a bad idea! By understanding the factors that affect rental property mortgage rates and following the tips we've outlined, you can get a lower rate and make your investment property more profitable. Ready to get started? Reach out today!