How Different Types of Property Use Can Affect Your Mortgage Rate

Buying a home is one of the most significant purchases most Americans make during their lifetime. As such, most individuals and businesses opt for mortgages to purchase or maintain real estate without paying the entire buying price upfront. Therefore, it’s crucial to understand how different factors can affect your mortgage rate.

These factors may include but are not limited to your down payment amount, interest rate type, and your intention of gaining ownership of the property you intend to purchase.

WHY DOES PROPERTY USE MATTER TO YOUR MORTGAGE COST?

Property use is vital because it shows a lender the extent to which a borrower will go before giving up on making payments on their mortgage.

For instance, let’s assume you own two properties, each with its own mortgage. One property is your principal residence. It’s where you spend most of your time or where your kids or spouse live. The other property is a dual apartment that you rented out. This is your investment property.

Now, let’s assume you’re faced with substantial financial deprivation, and you could only manage to keep making mortgage payments on one of your two properties.

WHICH PROPERTY WOULD YOU STOP MAKING PAYMENTS ON ITS MORTGAGE FIRST?

Most people would put a halt on the investment property’s mortgage (the dual apartment). This is basically why property use is of great importance to your mortgage cost. The market perceives less or more risk depending on the property’s use. Hence, it prices mortgages depending on the use of the property you intend to finance.

Therefore, the cost of your mortgage on a principal residence will be lower than it will be on an investment property.  However, there’s a third type of property use that falls between a principal residence and an investment property: the secondary residence.

A mortgage on a Secondary residence may have higher interest rates than on a principal residence. This is because they represent a greater level of risk. Since you don’t depend on your secondary residence for permanent residence, lenders assume that you are likely to default on making payments on the mortgage in case you fall on hard times. This type of property use is, however, less risky than an investment property mortgage.

THE 3 TYPES OF PROPERTY USE DEFINED

PRINCIPAL (PRIMARY) RESIDENCE

A principal residence is where your kids or spouse live or where you most likely spend most of your time. Principal residence mortgages are easier to qualify for than any other type of occupancy. And, they offer the lowest mortgage rates.

SECONDARY RESIDENCE

A secondary residence is much like a vacation home, and it’s not classified whether it’s the second home you currently own or you’ve ever bought. However, you must live in the house for some parts of the year and have exclusive control over the property.

It’s also important to note that if you choose a place too close to your principal residence, it may be regarded as an investment property, which could mean stricter qualifying requirements and higher mortgage rates.

INVESTMENT PROPERTY

An investment property is an additional property with the sole purpose of earning more income from it. These properties usually have the highest mortgage rates of all types of occupancy. People are more likely to prioritize paying the mortgage for a primary residence before the one used to generate extra income.

MORTGAGE FRAUD COMES WITH HEFTY CONSEQUENCES

Being dishonest about your property’s use on a mortgage application could land you in a tough spot.

Misrepresentations on mortgage applications are considered bank fraud and subject to prosecution, penalties, or jail time if convicted. Your lender may also call the mortgage due. This means you’d be required to repay the mortgage immediately and in the total amount. If you can’t afford to repay the mortgage, the lender could choose to foreclose the property.

Find a mortgage lender to guide you through the entire process toward purchasing your dream home today! At Atlantic Home Mortgage, we exist to provide financing and homeownership opportunities to get buyers their own piece of property in or around the surrounding areas of Alpharetta, GA.

If you have any questions about occupancy types, mortgages, or anything real-estate-related, contact Atlantic Home Mortgage for more info/help.