Investment mortgage rates can be the same as your primary residence mortgage rates. But that is not what you are told out there. An investment or non owner occupied mortgage is a mortgage on a property you do not live in. It is for rental properties.

Investment Mortgage Rates Revealed

A non owner occupied mortgage is more expensive but it doesn’t necessarily mean a higher rate. Mortgage lenders rates start at a base rate and as risk is introduced (non owner is riskier that owner occupied) add ons are charged. An add on can be paid upfront as part of your closing costs or paid by money created when the rate is increased.

Yield spread premium is the term for the money created by increasing the rate. Most originators don’t like to talk about add ons because then it opens up the door to the yield spread premium discussion and they really don’t want to talk about that. Instead they tell you investment mortgage rates are higher.

If you called and asked what investment mortgage rates were you might get the truth but more likely you would get a rate quote a full point or more higher. They went up the rate scale until they had a rate paying enough yield spread premium to cover the add on.

For example, Fannie Mae mortgage rates require an add on or hit of 3.00% if you put 20% down. If your loan amount is $200,000, then you would need $6,000 at closing to pay the add on in addition to your down payment and other closing costs. (3.00% add on X $200,000 loan amount = $6,000) But with the add on paid, you would get the very lowest rate possible. If you put down 25%, the add on is 1.75% so that is quite a difference. Refinance mortgage rates are the same story for these mortgages as long as you do not take cash out.

Why pay the add on upfront? Everyone knows the first rule in rental properties is cash flow. If you don’t have the discussion about investment mortgage rates with your originator, then you will end up paying a point higher or worse on your rental property.

The goal is to buy the property at the right price and pay the mortgage off as soon as possible. It always makes sense to pay any add ons upfront if you plan to hold onto a property for a long time. Then, you can use the rental income to liquidate the mortgage. And at an investment mortgage rate of 5.00% instead of 6.00%, that happens much faster.

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