How much higher are investment property interest rates?
As a general rule, investment property mortgage rates will typically be at least 0.50% to 0.75% higher than primary mortgage rates.
This is because lenders consider investment properties to be riskier than owner-occupied homes, given that borrowers are more likely to default on investment property loans. Keep in mind that these are general guidelines, and rates can vary significantly from lender to lender and from borrower to borrower.
Still, despite higher rates, investing in real estate is often a good long-term idea. Here’s how much you can expect to pay now to finance that future cash flow.Check today's investment property mortgage rates. Start here
In this article (Skip to...)
- Current interest rates
- Investment property rates
- What affects rates?
- How to get a lower rate
- Investment property loans
- Alternative loans
Current investment property mortgage rates for September 25, 2023
Investment property rates are usually at least 0.5% to 0.75% higher than standard rates.
At today’s average rate of % (% APR) for a primary residence, buyers can expect interest rates to start around % to % ( - % APR) for a single-unit investment property.Compare rates for your new home loan. Start here
|Loan Type||Primary Residence Rate||Investment Property Rate|
|Conventional 30-year fixed rate||% (% APR)||% to % (% - % APR)|
|Conventional 15-year fixed rate||% (% APR)||% to % (% - % APR)|
Note that today’s average rates are based on a prime borrower profile with a credit score of 740 and a 40% down payment. If you have lower credit or a smaller down payment, your interest rate will likely be higher than what you see advertised.
That’s why average rates should only be used as a benchmark. Your investment property rate will differ, so be sure to compare quotes from a few lenders and find the best deal for you.
What are investment property mortgage rates?
An investment property mortgage rate is the interest rate on a loan used to purchase or refinance an investment property, which is one that a borrower does not intend to live in as their primary residence.Check today's investment property mortgage rates. Start here
Most of the time, these properties are bought to generate rental income or to increase in value over time. Single-family homes, duplexes, triplexes, and apartment buildings rented out to tenants are examples of investment properties.
Investment property mortgage rates are usually higher than mortgage rates for primary residences because lenders consider them riskier loans.
How much higher are investment property mortgage rates?
Mortgage interest rates will always be higher on rental and investment properties than on your primary residence. But how much higher?
The exact answer to that question depends on the type of investment property, your creditworthiness, and your down payment. But as a rule of thumb, you can expect the interest rate on your investment property to be at least 0.50% to 0.75% higher than the rate on your primary mortgage.Compare rates for your new home loan. Start here
As a rule of thumb, you can expect investment loan rates to be at least 0.50% to 0.75% higher than the rate on your primary mortgage.
For example, today’s live 30-year fixed rate as of September 25, 2023 is % (% APR), so the investment property mortgage rate would be around % to % (% - % APR).
Lenders add this surcharge because they consider rental and investment property mortgages to be higher-risk. Mortgage borrowers tend to bail on rental properties before they’d bail on their primary residence if the going gets tough.
Furthermore, economic hardships also affect a renter’s ability to make monthly payments. So these types of home loans are more likely to default during hard economic times.
To protect themselves against the extra risk of investment property financing, lenders charge higher interest rates and have stricter qualification rules for borrowers. That makes it extra important to shop around to ensure you get a fair mortgage rate on your investment property before buying.
How are rates set for investment properties?
Behind the scenes, the rate you pay isn’t totally up to your mortgage lender. Banks often adjust their rates and fees to reflect the rules set by Fannie Mae and Freddie Mac.
Fannie and Freddie set the guidelines for most mortgages today, and the fees they charge directly affect the final interest rate you pay. Because of the increased risk of purchasing or refinancing investment properties, Fannie and Freddie charge higher fees on those transactions. Their fees trickle down to you as a higher interest rate.
|Type of investment property||Typical rate increase||Market interest rates (example)||Interest rate for investment property (example)*|
|1 unit||0.5 - 0.75%||5.5%||6.0%-6.25%|
|2-4 units||0.625 - 1%||5.75%||6.375%-6.75%|
*Rates shown here are an example set meant for comparison only. Your own rates will vary.
For instance, an investment property loan with a 25% down payment would require a fee equal to 6.375% of the loan amount. This is the same as $6,375 for each $100,000 borrowed. In most cases, the borrower will pay a higher interest rate instead of paying extra dollars in closing costs. So, how do these fees translate to your final rate?
In this case, 6.375% of investment property loan fees can be covered by an extra 0.5% to 0.75% added to the rate.
Keep in mind that this is for a single-family home. Buy a duplex, and you might pay another 1.0% in fees, or 0.125% to 0.250% added to your rate.
“To get the best rates, you will want to put at least 25% down. The ideal loan-to-value ratio for investment purchases is 75% or less,” advises Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
What affects my investment property interest rate?
Fannie Mae and Freddie Mac guidelines aren’t the only things that affect investment property mortgage rates. Your personal finances and the current rate market play a significant role too.Check your investment property rates. Start here
The following factors play a major role in determining rates:
- Your credit score
- Your debt-to-income ratio (DTI)
- Your cash reserves
- Loan-to-value ratio (LTV) on the investment property
In fact, your personal finances (including your credit report and possibly your tax returns) will be put under even stricter scrutiny when you buy an investment or rental property than when you buy a home to live in. It will take a more robust financial profile to qualify for your investment mortgage — and to score a competitive rate on top of that.
Investment property down payments
Most rental property buyers will finance their homes via conventional loans. Following are the down payment requirements to buy a rental property.
|Loan Type||1 unit||2-4 unit|
|Fixed-rate mortgage||15% down||25% down|
|Adjustable-rate mortgage||15% down||25% down|
A down payment of 15% to 25% is considerable, especially compared to the 3% you could put down on a conventional mortgage for a primary residence or the 0% down payment for homebuyers qualifying for the USDA or VA mortgage loan programs.
“Most investment lenders prefer buyers to have 25% down. You can go lower, but the rate may be significantly higher,” says Meyer.
Bigger down payment requirements are just another way lenders protect themselves against risk when underwriting loans for real estate investing.
Investment property credit score requirements
When you finance an investment property, lenders generally want to see a better credit score than they do for a primary residence. For instance, Fannie Mae borrowers putting at least 25% down could get approved with a 620 FICO score for a primary home. That minimum credit score increases to 640 for a rental.
If you don’t have great credit, you can try an FHA loan; the underwriting is much more lenient. FHA loans are available for homes with up to four units, and credit score requirements start at 580. The catch? You must live in one of the units, so the building is still technically your primary residence.
Other guidelines for rental and investment property loans
When you apply to buy a rental property, underwriters will verify your abilities as a potential landlord. If you’ve never owned a home or managed any property, you’ll have a tougher time. However, some lenders allow first-time real estate investors to get around this by hiring a property manager. There is nothing definitive about this in the official guidelines, so check with your loan officer.
There’s also a limit to the number of mortgaged properties you can own if you go with conforming loans (Fannie Mae or Freddie Mac). And you’ll be required to have cash reserves (several months’ worth of mortgage payments) in the bank to cover those months when your property is unoccupied.
How to get the lowest investment property mortgage rate
It’s hard to escape high interest rates on investment real estate. But there are ways to make sure you get the best deal possible.Check your investment property loan options. Start here
1. Make a bigger down payment
The surest way to get a lower interest rate on your investment property is to make a larger down payment. Much of the added cost goes away if you can put at least 20% down.
It might be worth borrowing against the equity in your current home to increase your down payment. You can also buy a cheaper house or find a foreclosure you can buy at below-market value. You could even consider, if this is an exceptional investment, borrowing against your 401(k).
2. Improve your credit score
Most rental property buyers will finance the purchase with a conventional loan (more on investment property loan types below). Rates for these types of investment loans are extremely sensitive to credit scores. Following is an example of a buyer with a 650 score compared to a 720-score buyer.
|Credit score||Home price||Down payment||Rate||P&I payment||Savings|
Because of the lower monthly payments, the home buyer with a better credit score could afford to offer tenants a better rental price. This real estate investor could also use the lower monthly payment to create more cash flow.
3. Reduce your existing debt
Your debt-to-income ratio compares your monthly debt repayments to your monthly gross income. Lenders use your DTI to determine the loan amounts you’ll have access to, and it shouldn’t exceed 43% for most types of loans.
Lowering your DTI shows lenders that you have plenty of room in your budget for monthly mortgage payments and other property management costs. These include homeowners insurance, property taxes, and ongoing maintenance and repairs.
4. Shop around
Home buyers often save hundreds of dollars per year — and thousands over the life of the loan — by shopping around for their mortgages.
This is a relatively easy step that many home buyers skip because it feels inconvenient. But as a real estate investor, you should aim to get the most bang for your buck. A lower rate will increase your revenue on the rental property, so put in the extra time to get at least three to five rate quotes and find your best financing option.
Pros and cons of investment property mortgage rates
Compared to loans for primary residences, investment property rates have their own set of advantages and disadvantages. Here is a list of some of the main benefits and drawbacks.
- You can finance a property that generates income for you. For example, you could borrow money to buy a rental property and earn rental income from tenants. This rental income can be used to pay off the mortgage while also building long-term wealth through property appreciation
- You can borrow more than with a traditional loan. Loan limits are frequently well in excess of $1 million. A real estate investor, for example, can use a jumbo loan to purchase a high-end property and generate significant rental income. The investor can pay off the loan with the rental income and build up a lot of wealth over time
- You’ll pay more to borrow money. The higher interest rates on investment property mortgage loans can lead to a higher overall cost of borrowing when compared to primary residence loans. This can impact the profitability of an investment property and may require the investor to generate more rental income to cover the higher mortgage payments
- You’ll face a larger down payment. In addition to higher interest rates, lenders typically require larger down payments for investment property loans, which can make it more challenging for investors to secure financing and enter the real estate market
- Your finances will face more scrutiny. Lenders often have stricter lending criteria for investment property mortgage loans, including higher credit score requirements and lower debt-to-income ratios. This can make it more difficult for some investors to qualify for financing
Types of investment property mortgage loans
When purchasing a rental property, you have access to many of the same property financing options as people buying their primary homes.Check your investment property rates. Start here
You can use a standard conventional loan (also known as a conforming loan) for an investment property. The minimum down payment is 15%, but 20% is recommended to avoid mortgage insurance.
You can buy an investment property with an FHA or VA loan if you choose a multi-unit property (2-4 units) and live in one of the units. These home loans come with minimum down payments as low as 3.5% for an FHA loan and 0% for a VA loan (when you meet eligible military service requirements).
Portfolio lenders can make up their own investment property loan rules. You may be able to put less down or finance more properties with these programs, but you should expect higher interest rates.
Non-warrantable condo loans
Suppose you’re drawn to a condominium that doesn’t meet conventional lending standards, known as a non-warrantable condo. In that case, non-warrantable condo loans may be your solution for purchasing this investment property.
Whether the issue is a single entity owning many units or too many rentals within the complex, by partnering with a lender that understands this niche market, you’ll be able to navigate the higher interest rates and more stringent qualifying requirements.
Hard-money lenders charge high interest rates and steep fees, but these short-term loans could help when you’ve found a great investment opportunity and need the money fast. Speed of financing is one of the only reasons to consider a hard money loan. Most real estate investors can find better financing options with another loan type.
Finally, there are commercial residential loans for those who want to borrow solely against the income of the property or buy projects with more than four units. They can be expensive and complex to set up. You will probably have to establish a single-asset bankruptcy remote entity, which prevents property owners from siphoning off rental income without paying the mortgage.
If you’re eyeing an investment property, a DSCR loan could be a suitable financing option. A commercial lender will analyze your debt service coverage ratio (DSCR) to ensure that the property’s net operating income can cover the loan repayment.
By dividing the net income by the total debt service, they’ll ascertain whether you have the financial stability to manage the commercial loan. A ratio of 1 or higher is often seen as promising, opening doors for you to secure the property.
How to get an investment property mortgage
Acquiring an investment property mortgage isn’t as daunting as it might seem. Here’s a step-by-step guide to help you know what to expect.
- Determine your investment goals. Understand what you want from your investment property. Are you looking for a long-term rental, a fix-and-flip, or something else? This will help shape the type of loan you’ll need
- Check your credit score. Lenders will look closely at your credit score. Make sure it’s in good shape, and if needed, take some time to improve it. The better your credit, the more favorable your loan terms will be
- Assess your financial situation. You’ll likely need a higher down payment for an investment property, often around 20–25%. Ensure you have the funds and ability to meet your monthly mortgage payments
- Shop around for lenders. Speak with multiple lenders to understand the types of loans available. Explain your investment plans and ask for their best rates and terms. Don’t hesitate to negotiate
- Get pre-approved. A pre-approval letter gives you credibility as a buyer and helps you understand how much you can borrow. It will make the process smoother once you find the right property
- Find the property. Work with a real estate agent experienced in investment properties. They can guide you to suitable options that align with your investment goals. Once you find the right property, make an offer and formally apply for the mortgage. Provide all required documents promptly, and stay in close communication with your lender
Remember, investing in property is both an exciting and serious financial decision. Aligning yourself with knowledgeable professionals, such as mortgage brokers and real estate agents who specialize in investment properties, can provide valuable guidance throughout the process. Stay diligent, do your homework, and that investment property will soon be yours!
Should I get an investment property mortgage?
Deciding to get an investment property mortgage is a personal choice that depends on several factors.
It’s essential to evaluate your current financial stability, including your ability to afford the down payment and monthly payments, as well as any additional expenses like maintenance and insurance.
Consider what your long-term and short-term investment goals are and whether real estate investing aligns with those goals. Understanding your risk tolerance and the local real estate market is also vital.
Owning and managing an investment property requires time, effort, and a willingness to take on certain risks. It may be beneficial to consult with financial advisors or real estate agents specializing in investment properties to get personalized insights based on your individual situation.
Alternative investment property financing
Along with the options mentioned above, there are other ways to finance investment properties.
- Home equity loan or line of credit (HELOC): If you have equity in your primary residence or another property, you can borrow against that equity to finance an investment property. Home equity loans and HELOCs often have lower interest rates than conventional investment property loans but put your primary residence or other property at risk if you default on the loan
- Cash-out refinance: Suppose the current rates are more favorable than what you have on your existing mortgage. In that case, you might think about a cash-out refinance, where you borrow more than your outstanding balance and keep the difference. This extra cash could cover all or part of the down payment on a rental property.
- Bridge loan: For those who are house flipping, a bridge loan can be a handy solution. It’s a short-term loan that you can use on a property you plan to sell. Although the rates and costs tend to be higher than standard investment property mortgages, a bridge loan offers the advantage of securing financing for the property even if it’s already on the market.
- Seller financing: In some cases, the seller of the property may be willing to finance the purchase, either in whole or in part. This can be an attractive option if the seller is motivated to sell and you can negotiate favorable terms. Keep in mind that seller financing usually involves a higher interest rate and a shorter repayment term compared to traditional loans
- Real estate partnerships: Partnering with other investors or pooling resources with friends and family can help you finance investment properties. In a real estate partnership, each partner contributes funds and shares in the profits and losses of the property
- Real estate crowdfunding: This method allows you to pool your money with other investors to finance investment properties. There are many online platforms that facilitate real estate crowdfunding, offering opportunities to invest in various types of properties and projects
Each financing method has its pros and cons, so it’s important to evaluate your financial situation, investment goals, and risk tolerance before choosing the best option for you.
Investment property mortgage rate FAQCheck today's investment property mortgage rates. Start here
Yes, mortgage rates are almost always higher for investment properties. Investment property mortgage rates for a single-family building are about 0.50 to 0.75 percent higher than for owner-occupied residence loan rates. If you’re purchasing a 2-4 unit building, expect the lender to tack at least another 0.125 to 0.25 percent onto your interest rate.
Yes, you can get a 30-year loan on an investment property. 30-year mortgages are actually the most common type of loan for second homes. However, terms of 10, 15, 20, or 25 years are also available. The right loan term for your investment property will depend on your purchase price, interest rate, and monthly budget. A higher interest rate or shorter loan term will mean higher monthly payments. A 30-year loan on your investment property will generally mean lower monthly payments but more interest paid over the life of the loan.
Whether or not you can qualify for a mortgage on an investment property depends on your financial portfolio. You’ll need a credit score of at least 640, though you probably want your score above 700 to qualify for a lower interest rate. You’ll also need a down payment of at least 15 to 20 percent and significant cash reserves.
The minimum down payment for a 1-unit investment property is 15 percent for conventional loans. However, it will come with mortgage insurance and higher rates. Make a 20 percent down payment to bring down costs. For a 2-4 unit home, the minimum down payment is 25 percent. If you are buying 2-4 units and can live in one of them, you can use an FHA loan with as little as 3.5 percent down.
You can buy a 2-4 unit home, live in one unit, and use an FHA loan with 10 percent down. Otherwise, there may be individual banks and lenders that offer proprietary programs with 10 percent down. Additionally, the seller could carry the financing and allow a 10 percent down payment. There are no conventional loan options (Fannie Mae and Freddie Mac) at 10 percent down.
These exist but will be tough to get. The only viable way is to buy a multi-unit property and live in one unit. Use an FHA loan, then get gift funds from an eligible donor for the 3.5 percent down. There are also hard money loans, lease-to-buy options, and going in on the home with an investment partner who has a down payment. If you’re a veteran or service member, you may be able to buy a multi-unit property with a zero-down VA loan — as long as you plan to live in one of the units while renting the others out.
A homeowner could use money from a cash-out refinance, home equity loan, or home equity line of credit (HELOC) for any purpose, including financing an investment property. For many investors, a second mortgage on their primary residence could generate enough cash for a down payment on a new property loan. But you’d be limited by the amount of equity in your existing home.
A real estate agent in your area could help you find rental properties to buy. You could also find properties on Realtors’ sites online or by driving around your region in search of real estate signs.
Perhaps the easiest way to obtain a rental is to buy a primary residence, live in it for at least a year, and then convert it into a rental. You move out, rent the home, and then rent or buy a separate residence. You keep your lower interest rate since you originally acquired it as an owner-occupied residence. It’s much easier to cash flow a property with this method.
Whether or not you make money on a rental property depends on many factors specific to your financial situation and the investment property itself. Keep in mind that the promises of big returns can be deceptive once you tally up closing costs, origination fees, property taxes, title and homeowners insurance, real estate agent commissions, initial renovation costs, and ongoing maintenance.
What are today’s investment property mortgage rates?
Mortgage rates for investment properties are higher than those for primary residences because they are viewed as higher-risk.
Still, rental properties are usually a sound investment in the long run, and a slightly higher rate might not matter much when compared to the returns you’ll see on the property. Plus, every applicant is different.
The best way to get your current investment property mortgage rate is to get quotes from multiple lenders and make them compete. Rates change all the time, so contacting lenders online is the quickest way to get a fistful of rates to compare.Time to make a move? Let us find the right mortgage for you