Investment Property Mortgage Rates: How Much More Will You Pay?
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You’ll typically pay anywhere from 0.5% to 0.875% 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. A number of factors affect how investment property mortgage rates are set, and there’s some good news on the horizon: Fannie Mae is reducing the markups, which may lead to a lower monthly payment or a smaller closing cost bill if you’re buying or refinancing a rental home.
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What is an investment property mortgage rate?
An investment property mortgage rate is a rate charged for financing a home that is used to generate rental income. Lenders are exposed to more risk when they make investment property loans. During hard financial times, tenants may not pay rent, the owner may not be able to afford repairs or the property may be vacant for an extended period.
These uncertainties increase the risk of default; if the investor can’t make money, they may be unable or unwilling to continue paying the mortgage. To cover the extra risk that your loan might default, mortgage lenders increase the rates they charge for investment homes. Default can cause lenders to incur fees related to foreclosing and reselling the property.
THINGS YOU SHOULD KNOW
In most cases, investment property mortgage rates are only offered by conventional mortgage lenders. Government loan programs, such as those backed by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture, only allow you to finance a home you’re buying to live in as your primary residence. However, there are some streamline government refinance programs that allow you to refinance a primary residence that’s been converted to a rental home if you currently have an FHA or VA loan, but you’ll be charged an investment property premium.
How do lenders set rates for investment properties?
In general, lenders use the same basic criteria to set rates for investment properties as they do for primary residences. Your credit score and loan-to-value (LTV) ratio (a measure of the size of your mortgage compared to your home’s value) carry the most weight. The differences begin once you start adding in the extra cost imposed by Fannie Mae for investment properties.
Rate changes in 2023: Fannie Mae, the government-sponsored enterprise that sets guidelines for conventional mortgages, announced some major changes to how mortgage rates will be set after May 1, 2023. We’ve provided an overview of all the changes if you want to skip to the “How to get the best investment property mortgage rates” section below.What factors impact investment property mortgage rates?
The table below provides an example of the extra “cost” of financing a $300,000 investment property loan at different LTV ratios. This is based on recent changes to the Fannie Mae loan-level price adjustment (LLPA) grid, which is what lenders are required to use when they price a mortgage rate for you. Keep in mind that lenders typically pass this cost on to you in the form of a higher interest rate, so you probably won’t see these charges on the loan estimates you receive when you’re shopping for investment property mortgage rates.
| LTV ratio | Additional cost expressed as a percentage of loan amount | Additional cost |
|---|---|---|
| 70% | 1.625%* | $4,875 |
| 75% | 2.125% | $6,375 |
| 80% | 3.375% | $10,125 |
Rate changes for better: This adjustment won’t be effective until May 1, 2023, and it reflects a half-percentage-point reduction in investment property fees if you have at least 30% equity in your rental home. That reduces the cost of an investment property rate by $1,500, which may lead to a better rate or lower costs after the changes take effect.Investment property mortgage rates vs. owner-occupied mortgage rates
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 20% down.
| Primary residence | Investment property | |
|---|---|---|
| Loan amount | $320,000 | $320,000 |
| Interest rate | 6.5% | 7.375% |
| Monthly payment (Principal and interest) | $2,022.62 | $2,210.16 |
| Total life of loan interest paid | $408,142.36 | $475,657.77 |
What the numbers mean
- You’ll pay $187.54 more per month with the investment property mortgage
- You’ll spend $67,515.41 more in interest over the full term of the loan
Investment property mortgage rates vs. second home mortgage rates
You won’t get any break on your interest rate if you buy or refinance a second home versus an investment property: The markups to both will be the same after the May 1, 2023, changes take effect.
THINGS YOU SHOULD KNOW
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’ll still be able to get the mortgage tax deduction for a second home. Although this won’t affect your interest rate, it could put some extra cash in your pocket.
How to get the best investment property mortgage rates
You’ll need a much higher credit score and more equity to get the best investment property mortgage rates in 2023. We’ve highlighted the changes below so you know each potential factor that could increase the rate you’re quoted, and added some steps you can take to avoid them.
Improve your credit scores
Make a bigger down payment
Reduce your existing debt
Check out multifamily rates this year
Pros and cons of investment property loan rates
| Pros | Cons |
|---|---|
| You can finance a property that earns you income | You’ll pay a higher rate than primary residence mortgages |
| You’ll pay slightly less for investment property rates after May 1, 2023 | You’ll need more equity to get the best rates |
| You may save on two-to-four-unit investment property rates after May 1, 2023 | You’ll typically pay more in closing costs for investment property loans |
Other ways to finance investment properties
- 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 down payment requirement on an investment property. The payment is usually fixed, and you can take all the funds 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 and pay the balance down for a set period.
- 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 you intend to sell. Rates and costs are usually higher than with regular investment property mortgages, but bridge loans allow you to get financing on the property even if it’s for sale.
- Non-QM (DSCR). If you have plenty of cash for a down payment but don’t want the hassle of income documents, a type of nonqualified mortgage called a debt-service coverage ratio (DSCR) loan may get you the money you need without all of the paperwork.
- Hard money. If your credit scores are too low for the financing types above but you’ve got a stockpile of cash for down payments and costs, a hard money loan may be worth a look. Expect high rates and upfront points, and watch for prepayment penalties.
Frequently asked questions
Yes. However, 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 they may offer incentives for rental property loans.
Although Fannie Mae guidelines set the minimum down payment requirement at 15%, most lender guidelines set a 20% minimum.
No. Conventional loan guidelines don’t permit you to receive a gift for an investment property down payment.
No. Lenders will only allow you to get primary residence mortgage rates on one primary residence. Lying about your occupancy plans could get you in trouble for mortgage fraud.
Yes. Cash-out refinance loans, home equity loans and HELOCs allow you to use the equity in your home to buy an investment property, if you qualify.