Interest rates make rentals, second homes attractive options

Aaron R. Jernigan is president of The Bank's Mortgage Bank.

Mortgage interest rates have been falling to historic lows, along with everyone's retirement plans and investments. This is a great time to diversify your portfolio and consider purchasing real estate as an investment vehicle.

A person can purchase a second home at the lake or at a favorite vacation spot, and obtain the same interest rate that's available for a primary residence. One positive aspect of purchasing a second home is that the buyer may be eligible to deduct the mortgage interest paid on the loan, depending on his or her tax bracket.

More importantly, the interest paid on a second home mortgage is now less than 6 percent. The 30-year fixed-rate mortgage for primary and secondary residences is 5.5 percent with no points, while the 15-year fixed-rate mortgage is 4.875 percent with no points.

The mortgage rates are based on the purchase of a single-family second home at $150,000 with a $30,000 down payment, and a 30-year fixed rate loan at $120,000 at 5.5 percent with no points and an annual percentage rate of 5.532 percent; and 4.875 percent with no points with an annual percentage rate of 4.929 percent on a 15-year fixed rate loan.

Paying lower mortgage interest on primary and secondary residences results in a faster accumulation of equity.

The recent trend has been to purchase real estate as a means of diversifying investment portfolios. Three factors are currently making rental property a very attractive investment.

First, mortgage rates are at historically low levels. The current 30-year fixed-rate for a single-family rental property is 6 percent with zero points.

This mortgage rate is based on the purchase of a single-family investment property at $100,000, with a $20,000 down payment, and a 30-year fixed-rate loan for $80,000 at 6 percent (APR 6.033 percent), with the borrower escrowing funds for real estate taxes and property insurance.

Second, buyers may now obtain fixed-rate financing on rental property as opposed to several years ago, when it was only possible to obtain an adjustable-rate-portfolio loan. This is important, as buyers are now able to lock-in fixed costs for the first 30 years of investment.

Third, a buyer may purchase and finance up to 10 properties including the primary residence on the secondary market, and fix the rate for 10, 15, 20 or 30 years.

There are a few things to consider about purchasing rental property. It is important to research the positives and negatives of being a landlord. It helps to use a real estate agent to assist in researching the market and purchasing the rental property.

Make sure you have enough time and desire to spend on the rental property for repairs, maintenance and rent collection. Choose a loan wisely and utilize a longer amortization period with a lower monthly payment if you are looking for a monthly cash flow from the investment. Or if a faster accumulation of equity is more important than cash flow, choose a shorter amortization period.

Remember, you do not have to be a real estate tycoon to purchase rental property. You can have an investment plan to own one rental property or 10. For a slightly higher interest rate, a buyer can even purchase rental properties with just a 10 percent down-payment.

So whether you're looking to take advantage of the low mortgage rates to purchase that second home at the lake, or to start building your rental portfolio, now is the best time to get started.