Current Investment Property Mortgage Rates
You’ll typically pay anywhere from a half to a full percentage point more for investment property mortgage rates compared to primary residence rates. The additional amount helps to cover the extra risk lenders take that you might default on your monthly payments.
There are things you can do to help reduce the cost markup, however. Keep reading to learn more about where today’s interest rates stand, and what you can do to secure the best rate available.
Today’s investment property mortgage rates
Investment property mortgage rates are generally a half to a full percentage point higher than the mortgage rates on conventional loans for residential properties. That’s because mortgage lenders are exposed to more risk when they make investment property loans.
During times of financial hardship, tenants may not pay rent, the owner may struggle to afford repairs or the property may be vacant for an extended period of time. To cover the extra risk of mortgage default, lenders charge higher rates for loans on rental properties.
To get a sense of how much your investment property mortgage rate could be, let’s take a look at current mortgage rates by loan type:
In most cases, investment property loans are only offered by conventional mortgage lenders. Government mortgage programs — such as FHA loans insured by the Federal Housing Administration, VA loans backed by the U.S. Department of Veterans Affairs and USDA loans guaranteed by the U.S. Department of Agriculture — only allow you to finance a home you’ll live in as your primary residence.
However, there are some streamline government refinance programs that allow you to refinance a primary residence that’s being converted to a rental property — if you currently have an FHA or VA loan.
How do lenders set investment property mortgage rates?
In general, lenders use the same basic criteria to set mortgage rates for investment properties as they do for primary residences. But with investment properties, your credit score and loan-to-value (LTV) ratio (which measures the percentage of your home’s value being financed by the mortgage) carry the most weight in the rate decision.
For example, Fannie Mae — one of the two largest mortgage entities that set conventional loan guidelines — implements cost markups for certain loan types (including investment property loans) based on a borrower’s LTV ratio and credit score range. This means the higher rate you’ll receive for an investment property loan is also affected by your credit score and down payment.
How to get the best investment property mortgage rates
- Boost your credit score. If your credit score needs some work, take some time to improve your score before applying for an investment property loan. The best mortgage rates are typically offered to those homebuyers with excellent credit scores — 780 or higher.
- Save for a bigger down payment. Fannie Mae’s guidelines give a cost break to investment property loan borrowers who have at least 30% equity in their property. With that in mind, you can take steps to reduce your rate by with a higher down payment on the home.
- Reduce your existing debt. Your debt-to-income (DTI) ratio compares your monthly debt payments to your monthly gross income and shouldn’t exceed 43%, in most cases.
- Shop around for a loan. Gathering quotes from more than one lender can also save you money. Borrowers who get quotes from multiple lenders stand to save an average of $76,000 on interest over the life of their mortgage, according to LendingTree data.
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Other types of investment property mortgage loans
- Home equity loan. If you’re sitting on a chunk of equity in your primary residence, you may want to take out a home equity loan to help fund the larger investment property down payment requirement. Home equity loan rates are usually fixed, and you’ll receive the funds all at once.
- Home equity line of credit. Known as a HELOC for short, this option works like a credit card secured by your home equity. You can use as much or little as you want, pay the balance down and reuse the line of credit for a set period of time.
- Cash-out refinance. If current rates are lower than what you’re paying on your first mortgage, consider borrowing more than you owe and pocketing the difference with a cash-out refinance. You can use the funds to pay for some or all of the down payment on a rental home.
- Bridge. If you’re in the fix-and-flip business, a bridge loan provides short-term money you can borrow on a home that you intend to sell. Rates and costs are usually higher than with regular investment property loans, but bridge loans allow you to get financing on the property — even if you plan to put it on the market.
- Debt service coverage ratio (DSCR) loan. If you have plenty of cash for a down payment, but you don’t want the hassle of income documents, a type of nonqualified mortgage called a DSCR loan may get you the money you need without the extra paperwork.
- Hard money. If your credit scores are too low for the financing types above but you have a stockpile of cash for a down payment and closing costs, a hard money loan may be worth a look. Expect high rates and mortgage points with this type of loan, and watch for prepayment penalties.
Investment property vs. conventional mortgages
If you want to compare investment property loans and conventional loans, it can be helpful to remember that most investment property loans are conventional loans. Typically, they just have a higher interest rate and higher upfront costs attached.
To get an idea of how investment property mortgage rates stack up against rates on a primary mortgage, we’ve crunched the numbers for a 30-year fixed-rate loan on a $400,000 home with a 20% down payment.
| Primary residence | Investment property | |
|---|---|---|
| Loan amount | $320,000 | $320,000 |
| Interest rate | 6.5% | 7.5% |
| Monthly payment(Principal and interest) | $2,022.62 | $2,237.49 |
| Total interest paid | $408,142.36 | $485,495.11 |
What the numbers mean:
- You’ll pay $214.87 more per month with the investment property mortgage
- You’ll spend $77,352.75 more in interest over the full repayment term
If you rent out your second home for 14 days or less per year (not uncommon in the age of Airbnb rentals), the house is considered a personal residence and you can keep the rental income tax-free. An added bonus: You can take advantage of the mortgage interest deduction for a second home.
Note that doing so won’t affect your interest rate — but it could put some extra cash in your pocket.
Pros and cons of investment property loan rates
Pros
- You can finance a property that earns you income
- You can deduct mortgage interest as a business expense
- You may qualify for certain lender incentives that can help keep costs down, depending on your property type and location
Cons
- You’ll pay a higher rate than for a primary residence mortgage
- You’ll need to meet stricter underwriting requirements, including making a bigger down payment
- You likely won’t be able to take advantage of government-backed mortgage programs
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Frequently asked questions
The average mortgage rate on an investment property loan will vary according to current market rates. However, as a rule of thumb, you can anticipate investment property mortgage rates being a half to a full percentage point higher than average mortgage rates for a primary residence.
Yes — but that doesn’t mean you shouldn’t shop around for the best investment property mortgage rates. Some lenders specialize in these types of loans and may offer incentives, which could include a lower down payment requirement for multiunit properties.
In some respects, it’s harder to get an investment property loan than it is to get a mortgage for a primary residence. You’ll often need a stronger credit score and a larger down payment.
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