Mortgage interest rates play a large role in how much mortgages cost, and they can also affect your cash flow.
Understanding real estate investment mortgage rates can help you find properties you can afford and profit from, as well as organize your finances before you head into a deal.
What is an interest rate?
There’s a price on the money you borrow, and it’s called interest. In other words, when you get a loan, you have to not only pay back the lender’s money but also pay the lender for borrowing their money. Earning interest is the primary way banks and other lenders make a profit.
The amount of interest you pay is expressed as a rate, or a percentage of the principal the lender charges. Lenders quote interest rates annually, meaning an interest rate shows the percentage of the total loan principal the lender expects you to pay in a year.
There are two main types of mortgage interest rates: fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs). The former features a rate that won’t change for the life of the loan while the latter features a rate that will change after a fixed-rate period.
How are mortgage interest rates calculated?
When you get a mortgage, you pay interest on a monthly basis. The lender divides your yearly rate by 12 to get your monthly rate, multiplies the monthly rate by your mortgage principal, and then applies the product as your interest payment to your monthly mortgage payments.
Let’s say you borrow a $300,000 FRM at 3.5 percent. To simplify the math, let’s express the interest rate as a decimal: 0.035. Divided by twelve, 0.035 equals 0.0029 (rounded down), which, multiplied by $300,000, equals $870 — your monthly interest payment.
Another way to calculate your monthly interest payment is to multiply your yearly rate (expressed as a decimal) by your mortgage principal and then divide the product by 12.
Does your credit score affect your mortgage interest rate?
Absolutely. Mortgage lenders dig deep into your credit score and history to determine how much risk is associated with your credit profile. In general, the lower your credit score, the higher the lending risk is to them, and the higher your interest rate will be.
What is an APR?
When you get a mortgage, you’ll see two interest rates on a quote: an interest rate and an annual percentage rate (APR). The APR and interest rate are not the same. The former expresses the interest rate with other loan costs—such as insurance, closing costs, and origination fees—rolled into it. For this reason, APRs are higher than interest rates on mortgage quotes.
Pro tip! When shopping around for quotes, pay more attention to APRs than you would standard interest rates. APRs offer more accurate mortgage cost representations since they incorporate other loan expenses.
Are mortgage rates higher for investment properties?
Generally, mortgage rates are higher for investment properties than they are for real estate you buy to live in since lenders associate them with higher risk. In fact, investment property mortgage rates are, on average, 0.25 to 0.75 percent higher than owner-occupied mortgage rates.
What is the current mortgage rate for investment properties?
Current investment property mortgage rates depend on the loan amount, down payment amount, and credit profile. Location largely sets investment property mortgage rates as well, with urban markets commanding higher rates than rural ones. You can find real estate investment mortgage rates in your area here.
The Bottom Line
Finding the right real estate investment mortgage rates might mean the difference between generating a profit or taking a loss. If you’d like to learn more about investing in real estate, head over to this article.
This article is provided by EveryIncome.
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