There are several reasons why your rate is higher on an investment or vacation home but the main reason is that properties that are not the borrowers primary residence are a higher risk to the lender regardless if you have excellent credit.

When caught in financial hardship, property owners are more likely to let an investment property go into foreclosure before they would default on payments on their own residences. To justify this higher default risk, banks charge higher interests for loans on investment properties than on primary homes.

Keep in mind as well, that when trying to refinance an investment or 2nd home property, because of the risk factor, banks tend to lower the LTV (loan to value) ratios. Homeowners should be aware of this when considering a refinance on these types of properties.

Rental properties are also more risky because a borrower’s ability to make a payment in many cases is based upon the residency status of the property. If the owner is unable to find a renter or if the property is severely damaged by the renters there is a higher rate of mortgage default. Therefore the lender tends to charge a higher interest rate. The higher the loan to value ratio, the higher the interest rate will typically be.

 

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