What are the properties with the highest mortgage rates in the USA?

How much you pay for your mortgage comes down to the risk the lender is taking on to provide you with the financing that you will need to acquire your dream. If you are investing in property to generate rental income or a vacation home, you can expect to pay more than if you’re buying a primary residence.

Likewise, if your home purchase is in an area that is considered risker due to redlining hangover from the past, the interest rate you pay could also be more elevated. Here’s a look at the difference between mortgage rates when buying property.

Investment property versus conventional loan rates

If you are considering purchasing property as an investment to rent out, you can expect to face more stringent requirements and a higher mortgage rate than if you are buying a home that will be your primary residence. According to LendingTree you could be looking at a mortgage rate of between 50 to 87.5 basis points higher than the current rate.

Why is this? Investors will want to keep their roof over their own head, so if the rental unit remains vacant for too long, they could just “cut their losses and run”. With that in mind lenders want to cover the potential increased risk by charging a little more for the loan. They will also ask for more information about the creditworthiness of the prospective borrower and their capability of keeping up with the financial demands that come with owning an investment property.

Purchasing a second home or vacation residence

If you fancy buying a second home or a vacation property you can also expect to incur additional costs compared to your primary residence. You’ll be asked to cough up a bit more for the down payment and have a slightly higher interest rate on your loan. Additionally, your lender may apply stricter requirements for cash reserves and debt-to-income (DTI) ratio.

According to Bankrate, your second home mortgage interest rate could be between half a percent and one percent more. You might be asked to put down at least ten percent upfront, compared to just three to five percent for a primary residence.

The bank will likely ask, depending on your credit and financial profile, that you have two to six months’ of cash reserves to cover payments on both of your properties. While on your primary residence the lender may be flexible with your DTI, allowing a ratio of up to 50 percent, that may be as low as 36 percent in the case of a second home.

Redlining and inequality when it comes to lending

Although redlining was done away with in 1968 with the Fair Housing Act, this vestige from the past that codified existing racial prejudices into the law for classifying geographic investment risk still haunts some homeowners and buyers to this day. Neighborhoods deemed especially risky to investors were denied access to loans insured by the federal government.

These tended to be in the oldest parts of cities and predominantly have nonwhite residents. Even though the policy was abandoned, decades of underinvestment have left these and other nonwhite neighborhoods with a perception that they are riskier for investors. This makes it harder for residents to move out of these areas entrenching segregation to this day.

It also contributes to the wealth gap between Black and White families. The increased interest rates paid by Black homeowners tacks on around $1,800 more each year on top of $400 more in property taxes.

Affordable housing projects do not decrease property values

And if you are a homeowner or buyer worried about an affordable housing project being built in your area depressing your property value, research by the Urban Institute may put your mind at ease. Looking at housing prices in Alexandria, Virginia using Zillow’s assessor and real estate database between 2000 and 2020 to estimate the relationship between affordable housing developments and sales prices of an array of properties nearby found a small but statistically significant increase in property values. Those properties within 1/16 of a mile of an affordable development, a distance comparable to a typical urban block, on average rose in value by 0.09 percent.