A condominium is often an attractive option for borrowers who require less space than a traditional detached home and want to avoid maintaining a yard. Condos appeal to first-time buyers, single homeowners and borrowers looking to downsize from houses. Owning a condo has its benefits, but also has drawbacks from a mortgage-lending perspective. The risks condos pose can cause your interest rate to be higher than it would for a house.
Mortgage lenders' biggest losses often come from condos, causing this home type to be viewed as more risky than detached houses, according to Bankrate.com. Condos are viewed by many industry professionals as a leading indicator of the health of the real estate market. While some lenders might reject condos altogether, most lenders just hit borrowers with an additional fee. The presence and size of these pricing "hits" typically vary by lender and market conditions.
The average hit to the interest rate on a condo loan is .125 percent to .375 percent. Low-rise condos with one to three stories in the building typically carry a higher interest rate of .125 percent to .25 percent, according to the Truth About Mortgage website. High-rise condos, which have four stories or more, generally have an even higher rate hit. In general, the interest rate hit for a condo is considered minimal when compared with rates on a house loan.
The hit for a condo can also be calculated in terms of a pricing adjustment or cost. The borrower can pay the additional cost of a condo loan up-front at closing in a lump sum. Conventional loan borrowers can expect a condo loan to cost about .75 percent of the loan amount when the down payment is less than 25 percent on a 30-year loan.
The cost of owning a condo is often lower than that of a house, due to lower purchase prices, despite the relatively higher interest rate. Condo ownership also entails homeowners association (HOA) fees, which typically cover exterior building maintenance, landscaping, common areas, amenities, certain services and limited insurance.
Borrowers must also consider that an HOA's financial stability can affect their ability to get a mortgage. Lenders consider the owner-occupancy rate and the number of homeowners delinquent on their HOA fees to determine whether a condo is sufficient collateral for the loan.
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