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Old 03-29-2009, 11:28 PM
 
617 posts, read 1,245,150 times
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Are interest rates on investment properties significantly higher than owner occupied? My husband and I are considering buying a house as an investment. It currently has a long term renter who would like to stay in the home. How difficult would it be at this time to get a third mortgage? We currently have two mortgages. One on our primary residence (a conservative estimate of about 50% equity in the home), and another on a vacation home (20-25% equity). We would put 20% down on the investment property. Assuming excellent credit and other non-real estate assets, would we be able to get a loan in this market, and how much higher are interest rates for investment properties?

Thank you.
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Old 03-30-2009, 02:53 AM
 
8,287 posts, read 22,030,562 times
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It sounds like you are trying to take equity out of your primary residence to obtain the 20% down payment for the Non-Owner Occupied investment property.

I doubt lenders are going to look favorably upon a "third mortgage" to raise the funds. I think you'd be better off by re-financing your first and second mortgages into one mortgage with a "cash out", if you can qualify for that loan.

The problem I see with this whole package is that it sounds like you don't otherwise have the money for the 20% down payment, which also suggests that you don't have the cash flow to cover that NOO property. Few lenders, if any, will extend you a loan on that property if you don't have the ability to cover the mortgage PITI every month if the house should be unoccupied.

So, even if you forcast the whole situation cash flowing while the investment property is occupied, the lender is looking at it from your cash flow standpoint of "what if?" the place is not generating an income.
I'd be looking at my finances to see if I can make my primary residence PITI within normal lending guidelines, and then the 2nd house if there was no cash flow, and then the 3rd house if there was no cash flow. Could you support all three mortgages if the two rental properties were vacant at the same time for a couple of months? If you can't do that out of cash flow or other income for a long period of time, than this 3rd house may not be a very good investment for you. Unless you've got some sort of guaranteed rental income ... a long term lease with a government agency, for example ... you must figure on the probability of vacancies and interruption of your cash flow. A lender most certainly will look at that risk ....
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Old 03-30-2009, 08:17 AM
 
Location: Censorshipville...
2,439 posts, read 3,763,790 times
Reputation: 1196
When I was looking to get a loan for an investment property, I was told .75-1.00% higher interest rate over a conventional loan. This was about 6 months ago so I'm not sure if things have become better or worse.
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Old 03-30-2009, 10:58 AM
 
617 posts, read 1,245,150 times
Reputation: 222
Quote:
Originally Posted by sunsprit View Post
It sounds like you are trying to take equity out of your primary residence to obtain the 20% down payment for the Non-Owner Occupied investment property.

I doubt lenders are going to look favorably upon a "third mortgage" to raise the funds. I think you'd be better off by re-financing your first and second mortgages into one mortgage with a "cash out", if you can qualify for that loan.

The problem I see with this whole package is that it sounds like you don't otherwise have the money for the 20% down payment, which also suggests that you don't have the cash flow to cover that NOO property. Few lenders, if any, will extend you a loan on that property if you don't have the ability to cover the mortgage PITI every month if the house should be unoccupied.

So, even if you forcast the whole situation cash flowing while the investment property is occupied, the lender is looking at it from your cash flow standpoint of "what if?" the place is not generating an income.
I'd be looking at my finances to see if I can make my primary residence PITI within normal lending guidelines, and then the 2nd house if there was no cash flow, and then the 3rd house if there was no cash flow. Could you support all three mortgages if the two rental properties were vacant at the same time for a couple of months? If you can't do that out of cash flow or other income for a long period of time, than this 3rd house may not be a very good investment for you. Unless you've got some sort of guaranteed rental income ... a long term lease with a government agency, for example ... you must figure on the probability of vacancies and interruption of your cash flow. A lender most certainly will look at that risk ....
Thanks for your response. No, we wouldn't use the equity in either residence as a downpayment. I was providing that information as an indicator of our current real estate assets, but perhaps that's irrelevant.

We have cash for the downpayment, and other assets to pay off all three mortgages, if necessary - though it wouldn't be pretty. But I don't know if a lender is only concerned about annual income and I'm not sure what would be enough to qualify for the third mortgage. Don't know if lenders have more stringent guidelines when it comes to an additional mortgage. There didn't seem to be when we got a mortgage for the second home, but that is a vacation home, and not a rental property. All three mortgages combined would be about three times our annual income.
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Old 03-30-2009, 10:59 AM
 
617 posts, read 1,245,150 times
Reputation: 222
Quote:
Originally Posted by oneasterisk View Post
When I was looking to get a loan for an investment property, I was told .75-1.00% higher interest rate over a conventional loan. This was about 6 months ago so I'm not sure if things have become better or worse.
Thanks.
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Old 03-30-2009, 11:59 AM
 
Location: San Jose (Willow Glen)
180 posts, read 476,005 times
Reputation: 94
Okay, here's the deal with investment properties.

Assuming it's a single family (1 unit) not a duplex or triplex, etc..

You can get rates similar to what you can get on an owner occupied property, but the fees are significantly higher.

The 'hit' (additional fee) for an investment property with 25%+ down is 1.75% of the loan amount. If you are only putting 20% down, it's 3.00%!, so that extra 5% would be prudent.

You used to be able to take a higher rate to offset the increased fees, but a couple things have happened.
First off, the fees were greatly increased last fall. They used to be about .50% - 1.00% depending on down payment.
Secondly, the amount that you have to increase the rate to offset the fees are obsurd due to what is called 'stack compression'.

It's a fancy way of saying lenders aren't giving as much credit for an increased rate as they used to.

How it works when you are taking an increased rate is that the entity who is purchasing the mortgage pays a broker/loan officer a premium for delivering a higher than market interest rate. The broker then uses this premium to offset the various 'hits' (investment, credit score, low downpayment, etc..) so that the borrower doesn't have to pay high fees (or it at least gives the borrower an option to pay fees and get a lower rate or not pay fees and take the higher rate).

There are two ways to look at this:
a) it's difficult for people to obtain high rate, low fees financing
b) it's cheaper than it used to be to buy down to a lower rate

With 25% down, and good credit, you should be able to get a 30 year fixed at around 5% with around 2pts. 4.5% would probably be around 3pts.

Hope this helps.
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Old 03-30-2009, 01:28 PM
 
617 posts, read 1,245,150 times
Reputation: 222
Quote:
Originally Posted by AndrewSoss View Post
Okay, here's the deal with investment properties.

Assuming it's a single family (1 unit) not a duplex or triplex, etc..

You can get rates similar to what you can get on an owner occupied property, but the fees are significantly higher.

The 'hit' (additional fee) for an investment property with 25%+ down is 1.75% of the loan amount. If you are only putting 20% down, it's 3.00%!, so that extra 5% would be prudent.

You used to be able to take a higher rate to offset the increased fees, but a couple things have happened.
First off, the fees were greatly increased last fall. They used to be about .50% - 1.00% depending on down payment.
Secondly, the amount that you have to increase the rate to offset the fees are obsurd due to what is called 'stack compression'.

It's a fancy way of saying lenders aren't giving as much credit for an increased rate as they used to.

How it works when you are taking an increased rate is that the entity who is purchasing the mortgage pays a broker/loan officer a premium for delivering a higher than market interest rate. The broker then uses this premium to offset the various 'hits' (investment, credit score, low downpayment, etc..) so that the borrower doesn't have to pay high fees (or it at least gives the borrower an option to pay fees and get a lower rate or not pay fees and take the higher rate).

There are two ways to look at this:
a) it's difficult for people to obtain high rate, low fees financing
b) it's cheaper than it used to be to buy down to a lower rate

With 25% down, and good credit, you should be able to get a 30 year fixed at around 5% with around 2pts. 4.5% would probably be around 3pts.

Hope this helps.

Very helpful. Thank you.
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Old 03-30-2009, 10:56 PM
 
617 posts, read 1,245,150 times
Reputation: 222
Thanks for all the replies. It looks like we won't be buying after all. The house we were considering is already under contract - after less than a week on the market. I knew it was priced to sell, but I'm a little surprised, given the market.
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Old 07-01-2010, 02:02 PM
 
1 posts, read 27,268 times
Reputation: 10
If the rates and fees are higher for an investment property, can't you just say it will be owner occupied? Besides bending the truth it seems that there wouldn't be many ways they could disprove what you said.
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Old 07-01-2010, 02:52 PM
 
Location: NJ
17,580 posts, read 20,658,964 times
Reputation: 15412
Quote:
Originally Posted by nostlost View Post
If the rates and fees are higher for an investment property, can't you just say it will be owner occupied? Besides bending the truth it seems that there wouldn't be many ways they could disprove what you said.
You call an outright lie bending the truth?
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