Good credit, so-so rates?

Question

Hello BP, I'm purchasing a rental from a turnkey provider in Chicago, as an out-of-state investor. I recently locked in a mortgage rate of 5%. However, I'm wondering why did I even receive such a relatively High rate with my credit score being 780 +? I thought having good credit makes you get a lower interest rate. Did I do something wrong? I put 20% down. I understand putting 25% down will lower my interest rate, but even with my score with 20 down, it just seems a little higher than the 4-4.5% than those online mortgage finders. Any thoughts on this?

Chris Mason · Answer

Less than 25% down payment for an investment property is the 2nd worst loan-level pricing adjustment (LLPA) of them all. Equivalent to having a 620 FICO and putting 5% down for an owner occupant. Page 2, table 2, direct from fammiemae.com (as it's from Fannie at the top, lenders generally all have the same LLPAs - or worse - but not better).

Those numbers you see, the 3.375% in this case, is how many discount points it would take to hold constant your interest rate. If you do not want a bumped rate at all, it'll be 3.375 discount points.

If you only want your rate bumped to where 25% down investment property would fall, without putting 25% down, it's 3.375% - 2.125% = 1.25 discount points.

Or you can do the standard 25% down.

If you want to know what the very worst loan level pricing adjustment is, ask your lender where 15% down would fall in terms of interest rate.

Kevin Drouillard · Answer

@Michael Facchini You're right. I spoke with the mortgage broker and he said I got 5% mainly because I'm not going to be living in it. The 25% down wasn't a huge difference, however, with 4.7% being the best. I honestly thought it would have been a nice jump down.

Michael Facchini · Answer

Kevin, that rate might be a little high but not a whole bunch higher than the more competitive rates out there.  Really depends on property type, loan amount, and other details to see how much room there might be.  But as others have said, you'll see the best rates at 25% down.

Kevin Drouillard · Answer

wow, thanks, @Chris Mason for the explanation. Now I have a better understanding of how to maximize what I can get. Especially with the option of discount points.

@Andrey V. , its good to see another investor in a very similar situation, because I was offered 4.75% rate with 25% down. I was beginning to think I was doing something wrong or was underqualified of some sort. It's good to see upper 4s and lower 5s are more 'normal' than the record lows of 4-4.5% being reported by some.

Good credit, so-so rates?

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