Although investing in a Florida rental property is a great way to create an additional income stream, most individuals never get beyond the idea phase for one of two reasons. Either they don’t know the process involved with financing a rental property or they’re afraid they won’t get approved for a loan. In most cases, it’s a matter of not understanding how rental property mortgages differ from regular home loan mortgages.
3 Most Significant Differences Between Rental Property Mortgages and a Mortgage for a Home
- Rental properties have higher interest rates – regardless of the record low interest rates that have been available the past couple of years, you’ll usually have to pay 1% to 2% more than the primary mortgage rate when purchasing rental property. The exact rate will usually vary based on your credit score, your equity in that property, and the specific type of rental property you’re purchasing.
- Rental properties normally require higher down payments – unlike a regular home loan where you can put as little as 3% down on the purchase of a primary residence, the minimum down payment on a rental property is usually 15% to 20%. But here’s the catch regarding that 3% down payment. Any time you put less than 20% down on the purchase of a home, you’ll be required to pay PMI or private mortgage insurance. Private mortgage insurance can cost you anywhere from 0.5% to 2% of the total home loan amount every year. Furthermore, PMI does not cover rental properties. As a result, you’re required to make a larger down payment on a rental property. Florida mortgage companies typically offer the best interest rates to buyers that put a minimum of 25% down on rental properties. You may consult with us to find the lowest interest rates based on your credit scores.
- Rental properties typically come with shorter loan terms – the typical loan term on a primary residence is 30 years. However, for rental properties you have multiple choices where the term of the loan is concerned. It can be an ARM (adjustable-rate mortgage) that has fixed initial terms of 3, 5, 7, or 10 years based on the loan program you choose. Or it can be a fixed-rate mortgage with a 15 or 20-year term. Again, this is based on the specific loan program chosen.