Phoenix area investors know mortgage interest rates go up when purchasing rental property. Why?
First of all, risk is behind all home loan rates. In fact, risk drives rate adjustments. Yes, Arizona Mortgage Rate direction (FHA, VA, Conventional etc…) is primarily based on market forces. However, the difference between Phoenix mortgage interest rates for different scenarios on any given day is all based on risk.
Primary & Investment Home Loan Rates
Pretend you are a mortgage bank. in addition, imagine you lend your own money to a home-buyer. Two buyers stand before you requesting a home loan. One buyer is financing their new primary residence and just cannot wait to move in and make it their own. The other buyer is from out of state and sees the new rental home they are financing as a money making rental property.
Your biggest concerns is getting your money back at some point from these borrowers. Which of these two borrowers will likely walk away from their mortgage obligation first?
- A homeowner living in the home where they have family dinners, celebrate holidays and measure the height of their growing children on laundry room wall OR
- An investor with no emotional tie & who does not use the home as shelter for their family.
The answer is clearly a homeowner living in the property as their primary residence will fight to the bitter end to make their mortgage payments even when times get rough. However, an investor would likely “let go” of the rental property long before they would default on a property they call HOME.
Mortgage Lenders Adjust for Investment Properties
Given the above, how would you (a Phoenix area mortgage lender), account for the added risk the rental property represents? The two easiest ways to accomplish this are:
- Require a larger down payment on rental property
- Charge higher home loan rates
Higher mortgage interest rates on rental property home loans provide lenders with additional revenue to offset risk. In addition, requiring larger down payments creates more equity in the case of a foreclosure as well as hopefully commit the investor more to the property.
By Jeremy House