Are These Interest Rates Especially High?

[Mike S.]

I’m grateful for any insights folks can provide on current interest rates for an investment property. Do the following rates (issued in the past few days) seem especially high:

For a single family rental home:

+200,000 purchase price, 25% down, 30yr 5.25% apr 5.379

+175,000 purchase price, 25% down 30 yr fixed 5.25% apr 5.3895

+150,000 purchase price, 25% down 30yr fixed 5.375% apr 5.55

+125,000 purchase price, 25% down 30 yr fixed 5.375% apr 5.57

For a multi-family (of two to four units):

+250,000 purchase price, 25% down 30 yr fixed 5.5% apr 5.918

+225,000 purchase price, 25% down 30 yr fixed 5.5% apr 5.603

+200,000 purchase price, 30yr fixed 5.5% rate apr 5.918

We were recently pre-approved and when I ultimately drilled down into the current rates our mortgage advisor could offer, this is what we were quoted.

I realize it's only possibly to speak in generalities without having a complete financial picture, but here's a snapshot: my wife and I are applying together and each have credit scores of approximately 800, very low DTI, and strong income/employment histories for the price range of properties we're considering. This loan would be for our first investment property, which we aim to purchase in Spokane, Washington (99205, 99224, 99201, 99203, etc.).

I realize that we should expect higher interest rates compared to someone who is purchasing their primary residence (perhaps 1% for an SFR and up to 1.2% for a multi-family), but I was definitely surprised by these rates—should I be? If so, what would you expect a reasonable rate to be for SFRs in the above price ranges?

Lastly, should I expect most lenders to require 25% down rather than 20% down for an investment property?

Thanks so much for your insights and assistance.

[Chris Mason]

Originally posted by @Mike S.:

I’m grateful for any insights folks can provide on current interest rates for an investment property. Do the following rates (issued in the past few days) seem especially high:

For a single family rental home:

+200,000 purchase price, 25% down, 30yr 5.25% apr 5.379

+175,000 purchase price, 25% down 30 yr fixed 5.25% apr 5.3895

+150,000 purchase price, 25% down 30yr fixed 5.375% apr 5.55

+125,000 purchase price, 25% down 30 yr fixed 5.375% apr 5.57

For a multi-family (of two to four units):

+250,000 purchase price, 25% down 30 yr fixed 5.5% apr 5.918

+225,000 purchase price, 25% down 30 yr fixed 5.5% apr 5.603

+200,000 purchase price, 30yr fixed 5.5% rate apr 5.918

We were recently pre-approved and when I ultimately drilled down into the current rates our mortgage advisor could offer, this is what we were quoted.

I realize it's only possibly to speak in generalities without having a complete financial picture, but here's a snapshot: my wife and I are applying together and each have credit scores of approximately 800, very low DTI, and strong income/employment histories for the price range of properties we're considering. This loan would be for our first investment property, which we aim to purchase in Spokane, Washington (99205, 99224, 99201, 99203, etc.).

I realize that we should expect higher interest rates compared to someone who is purchasing their primary residence (perhaps 1% for an SFR and up to 1.2% for a multi-family), but I was definitely surprised by these rates—should I be? If so, what would you expect a reasonable rate to be for SFRs in the above price ranges?

Lastly, should I expect most lenders to require 25% down rather than 20% down for an investment property?

Thanks so much for your insights and assistance.

 If you care about the rate, yes you will put 25% down.

It's not possible to comment on the exact pricing available to you without far more information than provided, but one thing to keep in mind right now is that with most lenders, their discount point buydowns have significantly more bang for your buck than normal.

If you google, a million websites will tell you that 1 point buys the rate down 0.25%. Right now, it's closer to 0.5%. Break even points are less than 4 years, typically, at the moment. I've seen a few scenarios where the break even is less than 2 years. It looks like rates have fallen to the point that lenders are no longer interested in competing on rate, rather they are competing on discount point buydowns. 

Right now lenders are trying to hedge against you refinancing before they've recouped their origination costs by collecting several months of interest payments. That's what you are seeing. The stick of a higher "no points" interest rate, the carrot of phenomenal buydowns. 

Since many consumers are going along with this and buying the rate down, you are continuing to see the average rates people get decrease even though the "no points" rates have slowed their rate of change substantially. 

Is it worth going into that level of detail with an audience of 1 person who isn't even in contract and in a position to lock or make a decision? Up to the LO.