In this article
- Investment Property Mortgage Rates Explained
- What are the Mortgage Rates for Investment Properties?
- The Math Behind Rental and Investment Property Loan Rates
- What are the Latest Investment Property Mortgage Rates?
- What Will Affect Your Property Interest Rate?
- Loans for Investment Properties Require a Larger Down Payment
- Credit score requirements for investment properties
- Other Important Guidelines For Investment And Rental Property Loans
- Three Ways to Secure a Lower Mortgage Rate on an Investment Property.
- 1. Increase Your Down Payment
- 2. Improve Your Credit Score
- 3. Shop Around
- Rental Property Mortgage Types
- Conventional Loans
- Government-Backed Loans
- Portfolio Loans
- Hard Money Loans
- Commercial Loans
- Alternative Investment Property Financing
- Rental and Investment Property Mortgage FAQs
- Are the Mortgage Rates Higher For Investment Properties?
- Can I Get A 30-Year Loan On an Investment Property?
- Can I Secure a Mortgage For an Investment Property?
- How Much Do You Need to Put Down For an Investment Property?
- Are There Any Investment Property Loans Available with 10% Down?
- Are There Zero-Down Rental Property Loans?
- Can I Use A Home Equity Loan To Finance An Investment Property?
- How Can I Find a Good Investment Property?
- Is There an Easier Way to Own Investment Properties?
Investment Property Mortgage Rates Explained
Investment property mortgage rates are becoming more relevant as people buy second properties. Rental and investment properties can help you to earn lots of money. When buying investment properties at a good price, and then financing it correctly, these opportunities can generate almost immediate income. Check out Investment property mortgage rates.
But securing cheap mortgage rates for an investment or rental is harder when compared to primary residences. This is because most lenders charge an extra fee for “non-owner-occupied” transactions for a property that you are not living in.
Despite the higher rates, choosing to invest in real estate is usually a good option for the long term. Here is more information on the 2021 prices to finance your cash flow in the future with investment property mortgage rates.
What are the Mortgage Rates for Investment Properties?
The interest rates for investment properties are always higher than primary residences.
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How much higher? Well, this will depend on the down payment, your creditworthiness, and the investment property type. However, in general, the interest rates on investment properties are typically 0.50% to 0.75% higher than the rates on primary mortgages.
For example, the 30-year fixed rate on 20 November 2021 is 3.125% (3.125% APR), which means the property rate for investments is around 3.625% to 3.875% (3.625 – 3.875% APR).
Lenders include these upcharges since they regard investment and rental property mortgages as riskier loan products. Mortgage borrowers are more prone to bailing on a rental or investment property before they would pull out on a primary residence when things get tough. This is why these types of loans are more susceptible to defaults, especially during tough economic times.
Research has indicated that even the “best” homeowners will stop paying a mortgage on a rental property when the property turns into a poor or bad investment. Lenders also know that when borrowers think of properties as a “business venture” the attachment to the property is less.
To safeguard themselves against these extra risks associated with financing investment properties, lenders typically charge higher interest rates and impose more stringent qualification rules when it comes to borrowers.
This is why it is really important that you compare your options to ensure you are receiving a mortgage rate that is fair on investment or rental properties well before you decide to buy.
The Math Behind Rental and Investment Property Loan Rates
The rates that mortgage lenders charge are not entirely up to a lender. Property lenders frequently adjust rates so that they match up to the rules that have been set by Fannie Mae and Freddie Mac.
Freddie and Fannie set fees and rules for the majority of mortgages of today. The fees that they are charging have a direct impact on the interest rate that you will finally pay.
Thanks to increased risks surrounding refinancing or purchasing investment properties, Freddie Mac and Fannie Mae charge a higher fee on these transactions. These fees will trickle down to the borrower as an increased interest rate.
For example, a 20% down property investment loan will attract a fee that equals 3.375% of the overall loan amount. This equates to $3,375 for every $100,000 borrowed.
In most instances, the borrow will choose to pay higher interest rates rather than having to pay extra in the closing costs. So, in what way do the fees translate to a final rate?
In this example, 3.375% in property loan investment fees could be covered by adding an extra 0.5% to 0.75% to the rate. This only applies to single-family homes. If you decide to invest in a duplex, the fees may increase by another 1.0% or 0.125% to 0.250% will be added to the rate.
What are the Latest Investment Property Mortgage Rates?
In general, investment property mortgage rates are at least 0.5% to 0.75% higher when compared to standard rates.
So the current rate of 3.125% (3.125% APR) for primary residences, borrowers can expect an interest rate of around 3.625% to 3.875% (3.625 – 3.875% APR) for single-unit investment properties. The current average rate is worked out on a “prime” borrower profile, a 30% down payment, and credit scores of 740 or higher.
If your down payment is smaller, or you have a lower credit score, the interest rate that you are offered will most probably be higher. This is why average rates are only used as a “benchmark”. The property rate you are offered for an investment property will differ, so make sure you compare a few quotes from different lenders to make sure you are securing the best deal.
What Will Affect Your Property Interest Rate?
Freddie Mac and Fannie Mae guidelines are just one of the things affecting investment property mortgage rates. All personal factors determining mortgage rates will also apply.
- Your cash reserves
- The loan-to-value ratio on an investment property
- Your debt-to-income ratio
- Your credit score
Your personal finances including your current credit report along with your latest tax return place even greater scrutiny when buying a rental or investment property when compared to buying a house you plan to reside in. Your financial profile will need to be more robust in order to qualify for investment mortgages and to secure competitive rates.
Loans for Investment Properties Require a Larger Down Payment
Credit score requirements for investment properties
When financing investment properties, lenders usually require a higher credit score when compared to what they require for a primary residence buyer.
For example, Fannie Mae borrowers that put down a minimum of 25% may secure approval with a 620 FICO score when it comes to a primary residence. This score will increase to 640 for rentals.
If your credit score is not that great, an FHA loan may work for you since the underwriting is usually more lenient. FHA loans are made available for residences with a maximum of 4 units, while the credit score requirement starts at 580. What is the catch? You are required to live in the building, so technically the property is regarded as a “primary residence”.
Other Important Guidelines For Investment And Rental Property Loans
When applying to purchase rental properties, the underwriter will first assess your abilities as a “potential” landlord. If you have never managed property before, or you don’t own a home, you will have a harder time.
Some lenders will allow a first-time real estate investor to bypass this by recommending that they hire an experienced property manager. This is not definitive in the “official guidelines” so make sure you find out about this with a loan officer.
There are also limits in place when it comes to how many properties you are allowed to own (with mortgages on them) when you have gone for conforming Freddie Mac or Fannie Mae financing. You will also need a reserve, which translates into enough money to cover mortgage payments for a number of months to cover the time frame that the property is not occupied.
Three Ways to Secure a Lower Mortgage Rate on an Investment Property.
It is not easy to escape the higher interest rates charged on investment or rental real estate. Here are a few ways to ensure you are securing the best possible deal.
1. Increase Your Down Payment
One of the easiest ways to secure better investment property mortgage rates on real estate investments is to increase your down payment. Most of the additional costs disappear when you put down a minimum of 20%.
It may be worth your while to borrow against equity from your current property so that you can increase the down payment for your rental property. Or purchasing a cheaper home. Or finding foreclosures where you are able to purchase below the market value.
You may even want to think about borrowing against a 401(k), only if it is an extremely good investment.
2. Improve Your Credit Score
Many buyers of rental properties finance their purchases with conventional loans (more information on types of investment property loans below).
Rates on these investment loan types are extremely sensitive to credit scores. Here is an example of a 650 score buyer compared to a buyer with a 720 score.
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Due to the decreased monthly payments, a buyer with a higher credit score can offer their tenants a more affordable rental price. These types of real estate investors can also use the decreased monthly payments to generate an increase in cash flow.
3. Shop Around
Studies have indicated that the typical home buyer could save about $90 a month when paying a mortgage when they make the effort to compare rates from different lenders. When it comes to investment properties, where stakes and rates are higher, the savings can be even larger.
Rental Property Mortgage Types
When buying investment properties, you can access most of the financing options available to buyers buying a primary residence. They just cost a bit more and are a bit more difficult to get.
It is possible to use a “conforming” or conventional loan for investment properties. The down payment is a minimum of 15%, but 20% is even better if you want to avoid having to pay for mortgage insurance.
You can purchase investment properties with a VA or FHA loan IF you decide on a multi-unit (2 to 4 unit) property and you reside in a unit in the building. These options come with a minimum downpayment of 3.5% for FHA, or 0% for a VA loan (when you match eligibility military service requirements).
Portfolio lenders often formulate their own rules when it comes to investment property loans. This could mean being able to put down less or finance more than one property with these types of programs. But you can expect that the interest rates will be higher.
Hard Money Loans
Hard money lenders always charge steep fees and higher interest rates. However, these are short-term loans that can assist if you find excellent investment opportunities and you are needing money fast. Financing speed is usually the only reason to go for one of the hard money loans. Many real estate investors usually find a better financing option with other loan types.
This option is available to buyers that want solely to borrow against the income of a property or to buy a project with over four units, Commercial residential loans are usually complex and expensive to initiate or set up. You may be required to set up a “single asset” bankruptcy-remote entity. This will prevent the property owners from using the rental income without paying for the mortgage.
Alternative Investment Property Financing
Your seller might be satisfied with a stream of income from you without the stress or hassles of having to be a landlord. Seller-financing might be a more cost-effective option when compared to brokers or banks.
Sellers might have more of an interest in unloading a property rather than earning a profit from the mortgage. Just ensure that you get the property inspected and appraised before you buy.
Alternatively, some lenders only work with financing commercial residential properties from apartment buildings to homes. Provided the income from the property is enough to cover your mortgage and any other expenses, the lender might be open to financing you for a bit less.
Rental and Investment Property Mortgage FAQs
Are the Mortgage Rates Higher For Investment Properties?
Yes, the mortgage rates will always be higher for an investment property. The mortgage rates for investment properties for single-family buildings are around 0.50% to 0.75% higher when compared to owner-occupied residential loan rates. If you buy a 2 to 4-unit building, the lender will add another 0.125% to 0.25% to the interest rate.
Can I Get A 30-Year Loan On an Investment Property?
Yes, there are 30-year loan options on investment properties. 30-year mortgages are a common loan type when it comes to second homes. However, there are also terms of 10, 15, 20, or 25 years available.
The loan term that is right for you on an investment property depends on the interest rate, your monthly budget, and the purchase price. A shorter loan term or higher interest rate usually translates into increased monthly payments. 30-year loans on investment properties will typically translate into more affordable monthly payments. However, the interest that you are paying will be more over the period of your loan.
Can I Secure a Mortgage For an Investment Property?
Whether you are able to qualify for an investment property loan will depend on your current financial portfolio. Your credit score needs to be around 640 or higher. It is best to have a score above 700 if you want to qualify for lower interest rates. Your down payment should also be at least 15% to 20%, along with enough cash reserves.
How Much Do You Need to Put Down For an Investment Property?
The down payment minimum for 1-unit investment properties is 15% for a conventional loan. However, these loans do come with higher rates and mortgage insurance. Make sure you put down a payment of 20% to bring your costs down. For 2 to 4-unit homes, the down payment is 25%. If you are purchasing a 2 to 4 unit, provided you stay in a unit, you can also look at an FHA loan with a down payment of 3.5%.
Are There Any Investment Property Loans Available with 10% Down?
You can purchase a 2 to 4 unit building and live in a unit, using an FHA loan with a 10% down payment. Alternatively, some individual lenders and banks provide “proprietary programs” at 10% down. At the same time, the seller may carry financing and permit a 10% down payment. There are no Fannie Mae/ Freddie Mac conventional options available at 10% down.
Are There Zero-Down Rental Property Loans?
There are zero-down property loans, but they are difficult to get. One of the options is to purchase a multi-unit building and then stay in one of the units. Use an FHA loan, followed by securing gift funds from eligible donors for your 3.5% down. You can also go for lease-to-buy options or hard money loans, and buy a property with a partner that has the down payment. If you are a service member or veteran, you might qualify for a zero-down multi-unit VA loan, provided you stay in a unit and rent the rest out.
Can I Use A Home Equity Loan To Finance An Investment Property?
Homeowners are allowed to use cash from a home equity loan, cash-out refinance, or a home-equity line-of-credit for any reason, which includes financing investment properties. For most investors, a 2nd mortgage on a primary residence can generate enough money for the down payment on another property loan. But your equity amount will be limited according to your current home.
How Can I Find a Good Investment Property?
Real estate agents in your local area may be of help when it comes to finding a rental property to buy. It is also possible to find properties on the websites of Realtor’s online.
Is There an Easier Way to Own Investment Properties?
The easiest to purchase a rental would be to purchase a primary home, live there for a year at least, then change it over to a rental. You then move out, offer the property as a rental, then buy or rent another residence. This allows you to keep your interest rate low since the property was originally acquired as a primary owner-occupied residence. It is far easier to cash-flow properties using this method.