What rate can I expect on refinancing a rental property - 1 percent above par?

Author: Rob K. Blake | Date: March 13, 2008 | Filed In: Refinancing Answers

The rate doesn’t have to be effected at all. Simply use the chart below to determine the investment property adjustment or “add-on”…and pay it as discount points directly to the lender. The rate will remain par if you negotiated a par rate in the first place.

Investment Property Adjustments:
<=75% LTV: add 1.5
75.01-80% LTV: add 2.00
80.01-90% LTV: add 2.50

These are only the add-ons for the added risk of investment property and you may have additional risk-based add-ons if you intend a cashout refinance over an above what you see here.

For example, if your loan to value is between 60-75%, your credit score is between 600-620, and you’re asking for a cashout refinance, the addition risk-based add-on for cashout is 1.75%.

Total add-ons would then be 1.75% plus the investment property add on of 1.5% for a total of 3.25% to get a par rate. You can see as your credit score drops and your LTV rises, the greater the add-on.

You could allow the rate to pay this 3.25% with what is called YSP. But it gets really costly and over the long haul even more so. To estimate the rate increase needed to produce 3.25 YSP points you can say for every .375% in rate over par you accept, 1
YSP point is created that you can use to offset add-ons. If par was 6.25% and you are willing to accept 1.5% (that is 4 x .375%) over par or 7.75%, you’d have 4 YSP points to pay add-ons and other closing costs.

To fully understand YSP or yield spread premium…read everything in our Category - Yield Spread Premium

Also as an investor obtaining the best rate on the mortgage is paramount for cashflow and I highly recommend you learn just how to go about it correctly…as you can see, it gets a little tricky. We outline the best strategy in our Mortgage Advantage system…click the link to learn more.

Great question!

UPDATE 10/10/2008
add ons for investment properties changed to the following:
less than 75% LTV 1.75
75% to 80% LTV 3.00
more than 80% LTV 3.75

Author: Rob K. Blake