A Look at Investment & Rental Property Mortgage Rates
Investment Property Loans
It is possible to make a lot of money with investment and rental properties even though the mortgage rates on these properties are higher than standard rates.
So, if you are able to purchase an affordable investment property and finance it in the best way, you can easily achieve a positive cash flow very quickly and even immediately in some cases. However, it is difficult to get a very cheap mortgage rate on an investment or rental property as opposed to a typical property that you want to reside in. This is due the fact that most lenders charge more for properties that you aren’t going to personally live in and these are referred to as non-owner occupied transactions.
We know you want to make the best decision when it comes to your home purchase (and you want to save the most money too...). This guide will help you understand what to expect before your mortgage, what you'll need during the process, and what to expect after your loan is complete.
Even though you’ll face higher rates, it is still a great idea to invest in real estate for the long term. We will now discuss the finances you’ll require to achieve this and make sure you enjoy cash flow from the property in the future.
How much more do you need to pay on investment properties?
You can expect mortgage rates on investment properties to be higher than the rates on your main home.
Exactly how much more will you have to pay? Well, this is dependent on the investment property type, how much you can down-pay on the property as well as your current credit score. With that said, it will likely be a minimum of 0.5% – 0.75% higher than the mortgage on your personal residence. To put this into perspective, the current rate is around 3% and an average investment property’s rate would likely be about 3.5% – 3.75%.
This additional charge is due to the fact that investment properties are inherently riskier in comparison to primary residences. Many people who get mortgages to pay for their rental properties often abandon their investment property first before abandoning their primary home if their financial situation declines. As a result, when there are difficult economic times, it is a lot more likely that investors will default on these loans.
According to research, people who are deemed as being good and reliable homeowners typically stop paying for their investment property mortgage once it turns into a poor investment. All lenders are fully aware of the mindset behind investment properties and that they are seen as a business which means that owners don’t typically become attached to them.
So, to reduce their risk when financing investment properties, most lenders will have a higher interest rate for these types of properties as well as more intense qualification requirements. As a result, it is essential that you shop around at different lending institutions first before deciding on one so that you are able to get a good mortgage rate on the property.
Determining loan rates for investment properties
The lender isn’t the only entity that determines the rate being charged. These lenders also change their rates according to Freddie Mac and Fannie Mae’s rules.
Both Freddie and Fannie determine the rules as well as fees on the majority of mortgages as well as the fees which impact the interest rate to be paid. So, due to higher risk of buying these types of properties, Freddie and Fannie charge larger fees for these types of transactions which lead to an overall higher interest rate for the mortgage.
One example of rate increases in comparison to market interest rate and investment interest rate is as follows. So, for a single property, the usual rate increase is up to 0.75% and the typical market interest rate is 3% whereas the rate for an investment property would be up to 3.75%. If 2 to 4 properties need financing, then you can expect an increase of up to 1%, typical rate at 3% and on investment property it would be up to 4%. Do keep in mind that these rates are only the same rates for illustration. So, the actual rate that you get would vary.
In another example, if you choose to pay a 20% downpayment on an investment property, then the fee would be about 3.375% of the entire loan figure. If $100,00 was borrowed, then according to these figures the fee would be $3,375.
Most investment property borrowers tend to select a higher interest rate as opposed to paying higher closing fees. As a result, to cover these fees, you’d have to pay between 0.5% – 0.75% extra on the loan rate. Additionally, remember these figures are according to a single home. If you want to purchase a duplex, then you’ll need to pay extra fees (1%) or an even higher rate (up to 0.25% extra).
The current rates on investment property are easy to figure out since they are usually a minimum of between 0.5 – 0.75% higher than the typical lending rates. Therefore, the current rate is around 3% for personal family homes, so if you want to buy a single home investment property, you can expect to pay an interest rate of at least 3.5% – 3.75%.
Keep in mind that the current average rate is dependent on the main borrower profile. This individual would typically have a 30% down payment available as well as a 740 credit score. In the event that you don’t have that much downpayment or even a lower credit score, then you’ll have to deal with a higher interest rate than the ones shown above or otherwise advertised. So, the average rates given by lending institutions should only be used as a guide.
Your personal rate on an investment property will vary so it is in your best interest to get different quotations from various lenders so that you can get the best deal possible.
Which factors impact interest rates on investment properties?
The guidelines set by Freddie Mac and Fannie Mae aren’t the only factors and there are many others that impact rates such as your:
Personal cash reserves
The loan to value ratio of the property
Debt to income ratio
As a matter of fact, all of your finances will be thoroughly checked which includes your credit report, tax returns etc. These checks are done more carefully when you’re trying to get financing for an investment property as opposed to a property that you intend on personally inhabiting.
Therefore, you will need to have a strong financial status in order to qualify for this type of mortgage and to get a very good rate.
Larger down payments are typically required for investment property loans.
The majority of people who buy rental properties typically get financing through regular loans. We will now look at some of the requirements for purchasing an investment property.
So, if you’re getting a fixed rate mortgage for a single unit family home then you’ll need to have a 15% down payment and a 25% down payment for a 2 to 4 unit home. An adjustable rate mortgage will require 15% down on single unit homes and 25% down on 2 to 4 unit homes.
Paying a 15 to 25% downpayment is a lot of money, especially when you consider that you’d only have to pay a 3% downpayment on a personal home. You can even get 0% down payment on personal homes if you qualify for VA or USDA loans.
One of the ways in which financial institutions or lenders protect their interests when giving out mortgages for investment properties is by requiring larger down payments.
Credit Score Needed for Investment Property
When lenders are investigating whether to finance an investment property or not, they prefer applicants that have higher credit scores in comparison to the scores of people who are trying to get primary home mortgages.
So, for example, if a borrower that is trying to get a mortgage for a primary home and they have a 620 credit score along with 25% down payment, a person that wants to get a mortgage for a rental unit will need to have a credit score of at least 640. In the event that your credit isn’t good you should attempt to get an FHA loan which has lower requirements.
You can get an FHA loan for properties with as many as 4 units and you’ll need a credit score of at least 580. However, the thing with this type of loan is that you’ll need to reside in one of the units. As a result, the entire building would still be labelled as being a main residence.
Checking Your Options
When you apply to get a loan for a rental property, the underwriters will thoroughly check your status and your capability of being a landlord. In the event that you’ve never managed property before or even owned your own home, then it will be more difficult for you to be approved.
There are some financial institutions that are fine with this and they deal with it by getting a property manager. However, this isn’t guaranteed, so make sure that you talk to your loan officer since it isn’t stated in the official guidelines. If you need Freddie Mac or Fannie Mae financing, there will be limitations placed on the number of properties that you can get mortgage type loans on.
Additionally, you will also need to have money reserves, which means many months of payments in your account to cover the times when your investment property isn’t rented.
Top 3 Ways to Get Lower Investment Property Mortgage Rates
It is challenging to avoid high interest rates on these type of properties, however, you can attempt to get the best deal available.
1. Work on your credit score
There are many buyers who will choose to fund their investment property purchase with a traditional loan.
The rates given for investment loans are highly dependent on credit scores and we will now look at a comparison of the rates given to two different investors who have a 720 and 650 credit score.
So, the person with a 720 credit score that is trying to get a loan for a $250,000 property with a 25% down payment will get a 5.125% rate and $1,020 in P&I payment. The person with a 650 credit score who is also trying to get a loan for a $250,000 property with 25% down payment will get a rate of 5.75% and P&I payment of $1,095. As a result, the person with the 720 credit score will enjoy savings of $75 per month.
The investor who has the higher score can then charge lower monthly rent due to the savings they enjoy from having a higher credit score. They can also use this savings to enjoy greater cash flow.
2. Pay a higher down payment
One of the easiest ways to enjoy a lower interest rate is to provide a larger down payment. A great deal of additional expenses will disappear once the downpayment is over 20%.
So, it may be a good idea to borrow on the equity of the home you currently reside in so that you can get a larger down payment for your investment property. Alternatively, you can buy a more affordable house or even source a house being sold under its market value such as a foreclosure.
If the property is an extremely good investment, then you should think about borrowing on your 401(k).
3. Thoroughly shop around
There are many studies that show that the typical home buyer can save as much as $90 every month on their mortgage by shopping around and choosing the best lender. The rates of investment properties are higher, however, this simply means that you can save even more money.
You should check at least three different lenders before deciding on one to finance your investment.
Rental Property Mortgage Types
You’ll likely be able to access the same financing options as persons who are trying to get a mortgage for their personal home. However, they are just a little more difficult to get and more costly.
You can get a typical or standard loan for a property you’d like to invest in. Keep in mind that you’d need to have a downpayment of at least 15%, however, you should aim to have at least 20% to avoid having to pay for mortgage insurance.
It is possible to get investment property financing using VA or FHA loans in the event that you purchase a 2 to 4 unit home and live in one of them. These types of loans allow you to pay as little as 3.5% down payment and you can even pay 0% down payment on VA loans once you are eligible.
Hard money Loans
These types of lenders have high fees and interest rates, however, they are short term loans that are great if you need to get money quickly for a good investment opportunity.
You should only get a hard money loan if you need quick financing since there are better options available.
These types of lenders usually have their own rules and requirements. However, you’ll likely be able to pay a lower down payment or be able to get financing for multiple properties. Keep in mind that they usually have higher interest rates.
Commercial loans are a great option if you want to buy property that has 4+ units or if you want to borrow against the property’s income. However, getting these loans is costly and difficult.
It will be necessary to create a bankruptcy remote entity for the asset so that the owners won’t be able to take rental income for themselves without first paying off the mortgage.
Alternative Types of Investment Property Financing
Sellers will surely be happy to have an extra income stream without needing to be landlords themselves. Seller financing is mostly cheaper in comparison to other brokers and banks.
The seller will most likely want to quickly get rid of the property as opposed to trying to make money from your mortgage. However, ensure that you get the property thoroughly checked, inspected and appraised before you decide to buy it. There are even lenders that mainly deal in commercial property financing. This includes all types of buildings such as apartment buildings, single family homes etc.
Once the income from the property is enough to pay the cost of the mortgage and other related expenses, they will be happy to finance you at lower rates.
Investment and Rental Property FAQ
Do investment properties usually command higher mortgage rates?
Yes, the rates for investment properties are always higher in most cases. The rate for a single family home that is an investment property would be about 0.5 to 0.75% more than the rate for non-investment homes.
So, if you want to buy a 2 to 4 unit investment rental building, then you’ll need to add between 0.125 to 0.25% more to the rate.
Would it be possible to get a 30 year loan for an investment home or building?
Yes. This is quite common on loans for second properties, however, you’ll also be able to get loan periods between 10 to 25 years.
The best loan term would be dependent on the cost of the property, your down payment, budget, rate etc. If you get a short loan term or a high rate, then this means that you’ll end up paying more money every month. If you select a 30 year term, then you’ll usually pay a lot less per month. However, you’ll end up paying more interest on the loan at the end of it.
Would I be able to get an investment property mortgage?
The chances of you being able to qualify for this type of mortgage is dependent on your personal finances. Basically, you will need to have a 640+ credit score, however, it is best to have one over 700 to get the lowest rate. Additionally, you’ll also require a 15 to 20% down payment as well as cash in the bank.
How much money will I need?
You will need to have a minimum of 15% down payment for typical 1 unit loans. However, it is best to have 20% so you don’t have to deal with higher rates or mortgage insurance. If you want to get a 2 to 4 unit home, the make sure that you have at least 25% down payment available.
The good thing about purchasing a 2 to 4 unit property is that you can get a FHA loan, live in one unit and enjoy a downpayment of as little as 3.5%.
Can I get investment loans with only 10% down payment?
Yes you can if you get an FHA loan for a 2 to 4 unit home. Besides this, there may possibly be other lenders who have particular programs that offer 10% down payment. The seller of the property can also do financing and they may possibly accept 10% down payment. That said, there are no conventional investment property loans that offer this option.
Do 0% down payment investment property loans exist?
Yes they do, however, they are very challenging to find.
You can buy a property with many units and live in one of them. This will allow you to qualify for an FHA loan which allows 3.5% down payment. You can then use gift funds to pay for that downpayment. Additionally, you can use hard money loans or even use an investment partner who can pay the downpayment. Service members and veterans can potentially get 0% down payment loans if they live in one of the units and rent out the rest.
Can I use home equity loans for financing?
Yes, this can be done with home equity loans, line of credit, cash out refinancing etc. There are many investors who get another mortgage on their main home so that they could get the cash necessary for the downpayment on an investment property. However, this amount would depend on the main home’s equity.
How to start looking for investment properties?
It is easy to start looking by hiring a well known real estate agent to find them for you. You can also check local real estate websites or even drive in various communities and look for sale signs on the houses.
Are there simpler ways to get an investment property?
The simplest method is to purchase your first rental property as your main home, live there for a while and then turn it into a rental property. All you need to do is find another residence, move out and rent out your home. This will help you to maintain a low interest rate and get cash flow.
What are the current investment property rates?
These rates are higher in comparison to the rates for primary homes due to being more risky investments.
With that said, rental properties are a very valuable investment and the higher rate won’t matter much in comparison to your returns. Keep in mind that every person that applies will have a different experience. So, the best thing to do is get as many quotations as possible and choose the best one.
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