Investing in real estate through rental properties has proven to be a reliable way to accumulate long-term wealth and add value to your family's financial portfolio. As with all investments, risks and financing requirements differ from those for a primary residence. In this article, we will convey a strong understanding of investment property mortgage rates and provide valuable information for potential investors, including the influence of factors like LTV (loan-to-value).

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Understanding Mortgage Rates for Investment Properties 

Interest rates charged by lenders for asset property loans, or investment property mortgage rates, are a critical aspect of investing in homes, especially multi-unit properties. A borrower's financial portfolio, including their credit score and down payment size, determines the rates received. On average, the better your economic standing, the better your mortgage rate. The housing market also plays a role in fluctuating rates. For example, during a seller's market, mortgage rates may be higher.

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Rental property lenders, such as Fannie Mae, want to ensure borrowers have good credit and can maintain their financial obligations, such as insurance and property taxes. The lending process differs from buying a primary residence, as there are stricter requirements (i.e., a larger down payment), and it is more expensive (i.e., higher interest rates).

Comparing Loan Rates for Rental and Primary Residences 

While buying an investment property is similar to the process of an owner-occupied or second-home mortgage, there are differences. Keep this in mind when reading articles and advice geared towards traditional home purchases on various sites.

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Unlike traditional home purchases, investment property loans tend to have higher mortgage rates, often ranging between .25 and .75 percent APR. Where the borrower falls in that range depends on the down payment, with those paying more upfront receiving less of an increase.

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The minimum down payment for an investment property loan is 15 to 20 percent, but the lowest rates are often unavailable until you raise it to at least 30 percent.

Why Are Interest Rates Higher on Investment Properties?

Mortgage rates are higher for investment properties, primarily due to the increased risk on the lender's behalf. Borrowers are more viable to default on a property other than their primary dwelling, so lenders are more stringent. More often than not, riskier investments result in loftier interest rates and harsher loan terms.

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Not only are there increased interest rates, but lenders also ask for more substantial down payments. For a one-unit investment property, a conventional mortgage requires at least 15% down, and a two- to four-unit investor property requires a minimum of 25% down. Loan terms are also often shorter than the standard 30-year residential mortgage.

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Rather than a real estate purchase, this process is likened to a business transaction with the primary aim of generating cash flow.

How to Shop for Investment and Rental Property Mortgage Rates

The best way to find affordable mortgages is to compare the rates and fees of several lenders. Borrowers will receive a loan estimate when they get pre-approved. Such estimations enable comparisons between every aspect, allowing you to see the total cost, including the closing costs, origination fees, interest rates, and more.

How to Attain Lower Investment Property Loan Rates

Before applying for a new loan or refinancing, there are several ways to improve your odds of landing lower mortgage rates. The following are potential steps to take toward securing the lowest loan rates possible:

• Improve your credit score: Investment property mortgages mandate a minimum of a 640 credit score. Alas, scores on the lower end will not deliver the most competitive rates. For better results, aim for your credit score to be 700 or higher before applying.
• Increase your cash reserves: Rental property lenders require cash reserves equal to at least six months' worth of mortgage payments, though having a year's worth or more is beneficial. Additional cash demonstrates that you can still make payments even during a vacancy.
• Put down a larger down payment: By contributing a higher down payment than the minimum requirement, investors borrow less money, meaning lenders take on less risk. Consider paying more than the mandated deposit amount, even up to 30 percent, for ideal long-term interest rates. This approach can also result in a better price for the property, secure better values in case you decide to sell later on, and limit the number of stocks you may need to liquidate from your trading account to fund the purchase.
• Reduce your debt-to-income (DTI) ratio: The general guideline is for borrowers to keep their DTI ratio below 43 percent. However, you need even more budgeting room due to the costs of owning a rental property, such as taxes and maintenance. While 75% of your anticipated rental income may be considered, lowering the DTI can do the same for the loan rates. It also allows more flexibility to buy in an area that might have higher prices or to accommodate a lot of friends who are interested in investing together. One way to reduce your DTI is by paying off outstanding debts, like credit report items or home equity line balances.

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Pros and Cons of Investment Property Loans

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Pros

• The borrower does not have to occupy the property.
• Borrowers can deduct interest and depreciation of a rental expense.
• Compared to traditional lending, loan amounts can be more substantial, and the benefits of owning rental property may include additional income streams and potential growth in property value.
• A primary residence is not at risk as collateral like home equity loans and HELOCs require.

Cons

• Interest rates are higher, as are the credit score requirements, to secure the lowest possible rates.
• Investment property loans require larger down payments, starting at 15 percent and sometimes up to 30 percent down.
• Stricter underwriting conditions for borrowers, from showing proof of extensive cash reserves to maintaining adequate DTI requirements.

FAQs About Investment Property Mortgages

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What Types of Loans Are Available to Finance an Investment Property?

A variety of loans, except those the government insures, can be used to fund your rental property. The most typical forms of investment financing are as follows:

• Investment property mortgage
• Home equity loan or line of credit (HELOC)
• Bridge loan
• Portfolio loan
• Hard money loan
• Cash-out refinance

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If you need a different solution, get seller financing or a commercial real estate loan to purchase a rental property.

What Is the Minimum Down Payment Requirement for Investment Property Loans?

With conventional lending, the lowest down payment is 15 percent. However, for borrowers to make a minimum down payment of 15 percent, a credit score of at least 700 is required. That is unless their DTI ratio is 36 percent or lower. In that case, a score of 680 is sufficient. Along with credit and DTI, the property type and loan program are other factors in determining a borrower’s down payment.

Can You Purchase an Investment Property Using Home Equity?

Eligible investors can utilize a cash-out refinance, home equity loan, or line of credit (HELOC) to access their main home’s built-up equity. That money can go toward the down payment on a mortgage for a new investment property. Such options use your primary residence as collateral, putting it at risk of foreclosure if you cannot repay these loans.

A home equity loan is similar to traditional lending, where you receive a lump sum and repay in fixed installments. On the other hand, a HELOC is a revolving line of credit that is more like a credit card. With a cash-out refinance, borrowers can take out a new mortgage larger than their existing one and withdraw the remaining amount in cash.

What Is Considered a Good Investment Property Interest Rate?

What is considered reasonable rates for an investment property changes each day for several economic and non-economic reasons. The only way to ensure you find the best interest rates is to compare quotes from multiple lenders. Utilize online resources and sites to monitor trends in selling and buying prices and help make informed decisions. A list of preferred lenders can be compiled by analyzing various loan offerings and interest rates.

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Contact a representative at Wesley Mortgage, Nashville’s hometown lender, to learn more about your investment property mortgage rates.

Click Here To Connect With Wesley Mortgage Today And Begin Your Mortgage Journey

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