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Investment and rental property mortgage rates: How much more will you pay? [VIDEO + FAQ]

Gina Pogol
The Mortgage Reports contributor

Investment/rental property mortgage rates are higher than for owner-occupied loans

Investment and rental properties can make you a lot of money.

If you acquire an investment property at the right price, and finance it correctly, it can cash flow for you almost immediately.

But getting an ultra-cheap mortgage rate on a rental or investment property is tougher than for a primary residence. That’s because lenders charge more for “non-owner occupied” transactions — loanspeak for a property you don’t plan to live in.

Despite higher rates, investing in real estate is often a good idea long-term. Here’s how much you can expect to pay now to finance that future cash flow.

Check today's investment property mortgage rates (Dec 15th, 2019)
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How much higher are mortgage rates for investment properties?

Mortgage interest rates will always be higher on investment properties than on your primary residence. 

How much higher? Technically, the answer to that question depends on the type of investment property, your credit-worthiness, and your down payment. 

But as a rule of thumb, you can expect the interest rate on your investment property to be at least 0.50-0.75% higher than the rate on your primary mortgage. 

As a rule of thumb, you can expect the interest rate on your investment property to be at least 0.50-0.75% higher than the rate on your primary mortgage.

The reason behind this upcharge is that for lenders, a rental or investment property is considered a riskier investment. Mortgage borrowers tend to “bail” on rental properties before their primary residence if the going gets tough.

Researchers from the Wharton School concluded that even “good” homeowners tend to stop paying their rental property mortgages if that residence becomes a bad investment. Lenders know that when you think of property as a business, you’re less attached to it.

To protect themselves against the extra risk that comes with investment property mortgages, lenders charge a higher interest rate and have stricter qualification rules for borrowers. 

That makes it extra important to shop around and make sure you’re getting a fair mortgage rate on your investment property before you buy.

Start shopping for investment property mortgage rates here. (Dec 15th, 2019)

The math behind investment and rental property loan rates

Behind the scenes, the rate your mortgage lender charges isn’t totally up to them. Lenders often adjust rates to meet rules set by Fannie Mae and Freddie Mac.

Related: Fannie Mae vs. Freddie Mac, what they do and how they affect your mortgage

Fannie and Freddie set rules and fees for most mortgages today — and the fees they charge directly affect the final interest rate you pay.

Thanks to the increased risk of purchasing investment properties, Fannie Mae and Freddie Mac 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 (sample) Interest rate for investment property (sample)
1 unit 0.5 – 0.75% 4% 4.5 – 4.75%
2-4 units 0.625 – 1% 4% 4.625 – 5%

Rates shown here are a sample set meant for comparison only. Your own rates will vary. Get a personalized investment property interest rate here

For instance, a 20-percent-down investment property loan would require a fee equal to 3.375 percent of the loan amount.

This is the same as $3,375 for each $100,000 borrowed.

In most cases, the borrower chooses to pay a higher interest rate instead of extra dollars at the closing table. So, how do these fees translate to your final rate?

In this case, 3.375 percent in investment property loan fees can be covered by an extra 0.5 to 0.75 percent addition to the rate.

Keep in mind that this is for a single-family residence. Buy a duplex and you might pay another 1.0 percent in fees or 0.125 to 0.250 percent in rate.

What is the current interest rate for investment property mortgages? 

Investment property rates are usually at least 0.5% to 0.75% higher than standard rates. So at today’s average rate of 3.7% for a primary residence, buyers can expect interest rates to start around 4.2-4.45% for a single-unit investment property. 

The current rate of 3.7% on a 30-year, fixed-rate mortgage is based on data from Freddie Mac at the time of publishing this article (October, 2019). 

Remember that average rates should be used as a benchmark only. Your own investment property rate will be different, so be sure to compare quotes from a few lenders and find the best deal for you. 

Get a personalized investment property mortgage rate here (Dec 15th, 2019)

What affects my investment property interest rate?

Fannie Mae and Freddie Mac guidelines aren’t the only thing that affects your investment property mortgage rate. All the personal factors that determine mortgage rates are in play, too. Things like: 

  • Your credit score 
  • Your debt-to-income ratio 
  • Your cash reserves 
  • Loan-to-value ratio on the investment property

In fact, your personal finances will be put under even stricter scrutiny when you buy an investment or rental property than when you buy a home. 

It will take a more robust financial profile to qualify for your investment mortgage — and to score a low rate on top of that. 

Investment property loans require larger down payments

Most rental property buyers will finance their homes via conventional loans. Following are down payment requirements to buy a rental property.

Loan type 1 unit 2-4 unit
Fixed-rate 15% down 25% down
Adjustable rate 15% down 25% down

15-25 percent is a considerable amount, given that many people can qualify for a mortgage on their home with as little as 3 percent down — or 0 percent if they qualify for a USDA or VA mortgage. 

Bigger down payment requirements are just another way lenders protect themselves against risk when writing loans for investment properties.

Investment property credit score requirements

When you finance an investment property, lenders generally want to see better credit than they do for primary residence buyers.

For instance, Fannie Mae borrowers putting at least 25 percent down can get approved with a 620 FICO score for a primary home. That increases to 640 for a rental.

If you don’t have great credit and plan to live in one of the units, you can try FHA, which is much more lenient.

Verify your investment property mortgage options (Dec 15th, 2019)

Other guidelines for rental and investment property loans

When you apply to buy a rental property, underwriters will check out your ability as a potential landlord. If you’ve never owned a home or managed any property, you’ll have a tougher time.

Some lenders allow you to get around this by hiring a property manager. There is nothing definitive about this in the official guidelines.

There are limits to the number of properties you can own with mortgages on them, if you go with conforming (Fannie Mae or Freddie Mac) financing.

And you’ll be required to have reserves (several months of mortgage payments) in the bank to cover those months when your property is unoccupied.

Three ways to get a lower mortgage rate for your investment property

It’s hard to escape high interest rates on investment property. But there are ways to make sure you get the best deal possible.

1. Make a bigger down payment

The surest way to get a lower interest rate on your investment property is to make a bigger down payment. Much of the added cost goes away if you can put at least 20 percent down. 

It might be worth borrowing against the equity in your current home to increase your rental’s down payment. Or buying a cheaper house. Or even (if this is a VERY good 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 loans are ultra-sensitive to credit score. 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
650 $250,000 25% 5.75% $1,095
720 $250,000 25% 5.125% $1,020 $75/mo

The buyer with the better credit score can offer a better rental price, or be much closer to getting the tenant to pay the full mortgage or even creating cash flow.

3. Shop around

Recent studies have shown that an average home buyer can save around $90 per month on their mortgage simply by comparing rates from a few different lenders. And for an investment property, where rates (and stakes) are higher, savings could be even bigger. 

We recommend comparing rates from a minimum of three lenders before choosing one to finance your investment property. You can start comparison shopping here

Types of rental property mortgages

When purchasing investment property, you have access to many of the same mortgage programs as people buying their primary homes. They just cost more and are harder to get.

Conventional loans: You can use a standard conventional (aka “conforming) loan for an investment property. The minimum down payment is 15%, but 20% is recommended to avoid mortgage insurance.

Government-backed loans: You can buy an investment property with an FHA or VA loan loan IF you choose a multi-unit (2-4 unit) property and live in one of the units. These come with minimum down payments as low as 3.5% for FHA and 0% for the VA loan (when you meet eligible military service requirements).

Portfolio loans: 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. Expect to pay more for them.

Commercial loans: Finally, for those who want to borrow solely against the income of the property, or buy projects with more than four units, there are commercial residential loans. 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 the rental income without paying the mortgage.

Consider alternative investment property financing

Your seller may be happy to have an income stream from you without the hassles of being a landlord. Seller financing can be cheaper than banks or brokers.

The seller may be more interested in unloading the property (get it appraised and inspected!) than in profiting from your mortgage.

Alternatively, there are lenders that specialize in financing commercial residential property — from homes to apartment buildings.

As long as the property income is sufficient to cover the mortgage and other expenses, they may finance you for less.

Investment and rental property mortgage FAQ

Are mortgage rates higher for investment properties?

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% higher than for owner-occupied residence loan rates. 

If you’re purchasing a two- to four-unit building, expect the lender to tack at least another 0.125-0.25% onto your interest rate. 

Can you get a 30-year loan on an investment property?

Yes, you can get a 30-year loan on an investment property. 30-year mortgages are actually the most common way to finance rentals. However, terms of 10, 15, 20, or 25 years are also available. 

The right loan term for your investment property will depend on your 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. 

Can I get a mortgage for investment property?

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 15-20% and significant cash reserves.

Find out whether you qualify for an investment property mortgage here (Dec 15th, 2019)

How much do you have to put down for investment property?

The minimum down payment for a 1-unit investment property is 15% for conventional loans. However, it will come with mortgage insurance and higher rates. Make a 20% down payment to bring down costs.

For a 2-4 unit home, the minimum down payment is 25%.

If you are buying a 2-4 unit and can live in one of the units, you can use an FHA loan with as little as 3.5% down.

Are there investment property loans available with 10% down?

You can buy a 2-4 unit home and live in one unit, and use an FHA loan for 10% down. Otherwise, there may be individual banks and lenders that offer proprietary programs at 10% down. Additionally, the seller could carry the financing and allow a 10% down payment. There are no conventional (Fannie Mae / Freddie Mac) options at 10% down.

Are there zero-down rental property loans?

These exist, but will be tough to get. One option is to buy a multi-unit home and live in one unit. Use an FHA loan, then get gift funds from an eligible donor for the 3.5% down. There are also hard money loans, lease-to-buy options, and going in on the home with a investment partner who has a down payment.

Is there an easier way to own an investment property?

Perhaps the easiest way to obtain a rental is to buy a primary residence, live in it for at least a year, then convert it into a rental. You move out, rent the home, 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.

Investment property interest rates: The bottom line

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 great 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. 

What are today’s investment property rates?

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 fist full of rates to compare.

Request investment property rate quotes here. (Dec 15th, 2019)