Recently an investor buyer of ours asked the question, "Why I am charged a higher interest rate on my investment properties?"

This is a good question. Generally investors pay an interest rate that is typically a quarter to a full point more on a mortgage for their investment properties than they would for their own homes.

The logic behind this is quite simple in that the lender considers the loan risker.  The investor does not live there, and a tenant does not typically have as much incentive to keep a property up as an owner occupant.  And think about it, if money gets tight an investor would more likely let an investment property go into default than their personal home.  This is known as the "roof over my head" theory in lending.

What you can do as an investor to narrow the gap or possibly eliminate it is to make your self as attractive a borrowor as possible.  You can trim the rate by putting down more than the customary 20 - 30% or by clearly documenting that you can afford the mortgage payments even without the rental income.  Or at least show that you as an investor have enough cash reserves to cover a several months' mortgage payments if needed.  However, we encourage our investor clients to NOT over leverage their investment properties.

To convince your lender that the your rental income is realistic, call us and have us do an market analysis for your lender to show what similar properties lease for.  It is also helpful to let you lender know what your landlord experience is and if your investment property is currently leased, how strong is that tenant.  These are all factors that can contribute to a lower rate.

Another option we recommend is to "buy down" the rate.  On a $200,000 loan, you could knock a quarter of a percentage point off your rate by paying $2000 up front.  You will easily recoup those funds through lower interest payments in about 5- 6 years.

For more investor lending tips please call us or visit our favorite lending expert Dave Reed @ www.CDReed.com.