Ultimate Guide to Investment Property Mortgage Rates

Banner image
ByChristopher Boston
Edited byVictoria Copans
ByChristopher Boston
Edited byVictoria Copans

Updated: October 16, 2023

Advertising & Editorial Disclosure

Not all mortgages are for primary residences — you can also get a mortgage for an investment property. An investment property is not a home you purchase to live in, but rather to use to diversify your income streams and invest in tangible assets. Rates for an investment property mortgage type are typically higher because lenders see investment properties as riskier. Familiarizing yourself with these rates can help you calculate potential returns and help you maximize your real estate investment.

Current Investment Property Mortgage Rates

Mortgage rates fluctuate daily, with investment property mortgage rates currently hovering between 6% and 7% and varying across different loan types. Staying updated with these rates is important if you’re planning to purchase an investment property as they directly affect your loan's cost and, eventually, your potential return on investment. A higher rate means a higher cost, reducing your net income from the property. Conversely, a lower rate increases your potential profit. Knowing current property investment interest rates can help you make calculated decisions about when to invest and what type of property to buy.

Loading...

How Do Lenders Set Investment Property Mortgage Rates?

Lenders consider a range of factors when setting mortgage rates for investment properties. Think of these as puzzle pieces, each contributing to the overall picture of your financial health and potential risk as a borrower. Here's a look at some key components:

  • Economic Factors: Economic trends like inflation or economic growth can push rates up or down. Lenders usually raise rates when the economy is strong to capitalize on the boom. Conversely, lenders tend to lower rates during economic downturns to encourage borrowing. You can anticipate potential rate changes by keeping an eye on the economy.

  • Credit Score: Your credit score is a quantified summary of your credit history. For lenders, a good credit standing indicates financial responsibility, which lowers your risk as a borrower and leads to a lower rate. If needed, you can take steps to improve your credit score before applying for a loan.

  • Debt-to-Income Ratio: Your DTI gives lenders an idea of how well you manage your debts relative to your income. A lower debt-to-income ratio implies that you have a good handle on your debts and can comfortably take on more, which might lead to a better loan rate.

Understanding these factors allows you to take proactive steps towards securing a favorable mortgage rate for your investment property.

Types of Investment Property Loans

Understanding different investment property loan types allows for flexibility in managing your portfolio. For instance, a fixed-rate loan might offer stability with unchanging monthly payments, while an adjustable-rate mortgage may start with lower initial payments. Investment property loan rates can vary depending on the loan type, affecting your total repayment amount.

Investment Property Loan Types
What it Is
Why You Should Use It

Fixed-Rate Mortgage

A loan with an interest rate that stays the same for the entire loan term.

It provides predictable payments and protects you from potential future interest rate increases.

Adjustable-Rate Mortgage

A loan with an interest rate that can change over time based on market rates.

It could offer lower initial rates and payments, which might be beneficial if you plan to sell or refinance before the rate adjustments.

Interest-Only Mortgage

A loan where you initially pay only the interest for a certain period, after which you start repaying the principal.

It offers low initial payments, which might help if you anticipate higher rental income in the future to cover the higher payments when you start repaying the principal.

Balloon Mortgage

A loan with lower initial payments that end with a large one-time payment at the end of the loan term.

It might work for you if you plan to sell the property before the term ends or expect to be in a better financial position to handle the balloon payment.

Be sure to assess your financial capacity and investment horizon in order to select a loan structure that matches your investment strategy, potentially optimizing your returns.

How to Qualify for an Investment Property Loan

Lenders look at your financial stability and the likelihood that you'll meet your loan obligations when you apply for an investment property loan. Understanding these eligibility requirements can help you streamline your application process and increase your chances of approval. It's also beneficial in securing investment property interest rates that match your financial capacity. Although every lender has a unique set of requirements, here are some common ones across the industry:

  • Credit Score: A good credit score is usually a basic requirement for any loan, and it's no different for investment property loans. A better score (preferably 620 or higher) typically translates to better loan terms and interest rates.

  • Debt-to-Income Ratio (DTI): This ratio indicates your monthly debt obligations against your gross monthly income. Lenders usually prefer a DTI of 45% or less to ensure you can comfortably manage the additional debt of the investment property loan.

  • Loan-to-Value Ratio (LTV): This refers to the ratio of your loan amount to the appraised value of the property. A lower LTV often means lower risk for the lender and could lead to more favorable loan terms.

  • Property Evaluation: Lenders will evaluate the property you plan to purchase to ensure its price is justified and assess any potential risk associated with the property itself.

  • Cash Reserves: Lenders may require proof of cash reserves to cover mortgage payments for a certain period, typically six months or more. This assures lenders that you're less likely to default on your loan.

  • Employment History: Stable employment history and a steady income can increase your odds of loan approval. Most lenders prefer borrowers who have been in the same job or field for at least two years.

Overlooking these requirements might lead to less favorable loan terms, higher interest rates or loan denial. Preparing for these eligibility criteria can help you secure the best loan for your investment property.

How to Secure the Best Investment Property Mortgage Rates

There are several strategies you can implement to secure more competitive rates, even if your finances aren't perfect. These tactics can help you navigate the lending landscape more efficiently and potentially save money in the long run.

  • Improve Your Financial Profile: This involves improving your credit standing, lowering your debt-to-income ratio and increasing your savings. For instance, paying off credit card debts can increase your credit score, while setting aside a portion of your income each month can boost your savings. A healthier financial profile can improve your chances of securing lower rates.

  • Shop Around: Don’t settle for the first rate you're offered — different lenders can offer different rates. For example, credit unions may offer lower rates compared to traditional banks. Take your time to compare loan offers from multiple lenders to ensure you're getting the best deal possible.

  • Consider a Larger Down Payment: Although it may seem daunting, a larger down payment can result in a lower loan-to-value ratio, which lenders often find attractive. This strategy can lead to more favorable loan terms and lower interest rates.

  • Leverage Discount Points: Buying mortgage points means paying an upfront fee to lower your interest rate. It's an effective strategy if you intend to hold onto your property for a long time, as the savings from a lower rate can eventually outweigh the initial cost.

Considering these strategies will allow you to put yourself in a stronger position to secure the best possible investment property mortgage rates.

How Do Property Investment Loans Differ From Conventional Loans?

Property investment loans and conventional loans both provide financing options and have the same application and approval process, but they differ in significant ways. For example, investment property mortgage rates are typically higher than conventional loan rates. Lenders tend to associate higher risk with investment properties — since an investment property won’t be your primary residence, the likelihood you’ll default on your loan is higher. As an investor, understanding these differences can help you make informed decisions about your borrowing options.

Aspect
Investment Property Loans
Conventional Loans

Interest Rates

Generally, these loans come with higher rates due to the perceived increased risk.

These usually have lower rates as they are less risky for lenders.

Down Payment

Often require a larger down payment, usually 15% to 20% or more.

Smaller down payments are accepted, some as low as 3%.

Property Type

These loans are specifically for properties that the borrower doesn't intend to occupy.

These loans are for properties the borrower plans to use as their primary residence.

Loan-to-Value Ratio (LTV)

Lenders usually allow a lower LTV ratio for investment properties.

Conventional loans might have higher LTV ratios, making it easier to finance a larger portion of the purchase.

Credit Score

They might require a higher credit score due to the higher risk associated with investment properties.

Borrowers might qualify with a lower credit score.

Choosing between an investment property loan and a conventional loan depends on your goals and circumstances. If you're planning to rent out the property or use it for non-residential purposes, an investment property loan would be the way to go. However, if you're planning to live in the property as your primary residence, a conventional loan is a suitable choice.

Alternative Financing Options for Investment Properties

Sometimes, an investment property loan isn’t the best option for you and you might want to consider other financing options. For example, conventional loans might be a good alternative if you have strong credit scores and a lower debt-to-income ratio, while government-backed loans could be best if you prefer lower down payments.

Financing Options and Description
Pros
Cons

Conventional Loans: These are the standard loans offered by most banks and mortgage lenders. They are not insured by the government. For investment properties, you'll typically need a 20% down payment.

Lower interest rates if you have a good credit score and low debt-to-income ratio.

Higher down payment requirements and stricter credit requirements.

Portfolio Loans: These loans are kept by the lenders in their investment portfolios instead of being sold on the secondary market. Lenders can set their own rules, so they might be more flexible.

Greater flexibility with loan terms and eligibility requirements.

Typically higher interest rates, and not all lenders offer them.

Hard Money Loans: These are short-term, high-interest loans from private investors or companies. They are often used for fix-and-flip investments.

Quick access to funds and less emphasis on the borrower's financial situation.

High interest rates and short repayment periods.

Commercial Loans: These loans are used for larger investment properties like apartment buildings or commercial spaces. They are usually handled by commercial banks.

Available for larger investment properties.

Higher interest rates, more strict eligibility requirements and larger down payments.

Home Equity Loans: A loan that allows you to borrow against the equity in your primary residence. You can use the funds to purchase an investment property.

Lower interest rates and potential tax benefits

You're putting your primary residence at risk if you can't repay the loan.

Each financing option comes with benefits and risks. It's worth exploring all available options and consulting with a mortgage advisor to determine the most suitable one for your investment goals and financial situation.

Frequently Asked Questions

Exploring these commonly asked questions can provide you with valuable insight about how investment property mortgage rates work, allowing you to make more informed decisions and potentially save money over the life of the loan.

How do mortgage rates for investment properties compare to rates for primary residences?
What factors influence investment property interest rates?
Are fixed-rate or adjustable-rate mortgages better for investment properties?
What are the differences in loan terms between investment property loans and conventional mortgages?
Are there refinancing strategies to lower investment property mortgage rates?

About Christopher Boston


Christopher Boston headshot

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.