Find the Perfect Mortgage Rate for Your Investment Property

You’ve always known the power of a smart investment. So, when it comes to securing a mortgage for that next big real estate venture, understanding the ins and outs of the mortgage rate on an investment property isn’t just useful—it’s crucial. 

The difference between an okay deal and a great one often hinges on that percentage point you manage to shave off your loan rates. In this article, you will find out about current investment property mortgage rates, common types of investment loans, and the prospects of refinancing. So, let’s dive right into the nitty-gritty of these rates and figure out how you can play them to your benefit.

Understanding Investment Property Mortgage Rates

Investment property mortgage rates are the interest charges investors pay to finance a property solely for investment purposes. These rates depend on the investor’s creditworthiness, the cost of the property they wish to acquire and the type of lender they work with.

Typically, lenders charge higher interest rates for investment property loans because these properties present more risks than owner-occupied homes.

What are investment property mortgage rates?

An investment property mortgage rate is the interest rate on a loan intended to buy or refinance an investment property, which is one that the borrower does not intend to use as their primary residence.

Most of the time, these properties are bought to generate rental income or to increase in value over time. Single-family homes, duplexes, triplexes, and apartment buildings rented out to tenants are examples of investment properties.

How are these rates set?

Investment property mortgage rates are usually at least 0.5% to 0.75% higher than standard rates.

For example, if the current market rate for a 30-year, fixed-rate mortgage on a primary residence is around 7 percent, the rate for an investment property might be 7.5 percent to 8 percent.

These rates are subject to change, however, and vary widely based on both overall market conditions and factors like the borrower’s credit score, the loan-to-value (LTV) ratio, the loan amount and the property’s location and type.

Why are they higher than residential property rates?

The main reason investment property mortgage rates can be higher than other types of mortgages is that lenders consider investment property mortgages to be at a higher risk of default than other occupancy types.

If the borrower encounters a financial hardship, they’re more likely to make sure the costs on their primary residence are paid first. Investment properties also require a lot of work and money to maintain.

If the owner has a hard time finding tenants or ends up putting more money into their investment than they’re getting out of it, they could decide to walk away.

Factors Influencing Investment Property Interest Rates

Also, don’t forget that the amount you’re planning to borrow and the location of your dream property can make a big difference in what you’ll end up paying. If you’re buying a very high-cost property, you may pay more in interest.

Some states also have higher average rates than others.

Role of down payments

The amount you’ll need to purchase an investment property can vary depending on your lender — but typically you’ll need a minimum of 15% down for a single unit, and 25% down for a two to four-unit property.

You’ll get the best interest rate on an investment property with a down payment of at least 25%.

Credit score requirements for investment properties

Note that today’s average interest rates for investment properties are based on a prime borrower profile with a credit score of 740 and a 40% down payment.

If you have lower credit or a smaller down payment, your interest rate will likely be higher than what you see advertised.

Other guidelines for rental property and investment property loans

Mortgage lenders know that investment property loans are riskier than loans for owner-occupied homes. That’s because if a borrower gets into financial trouble, they’ll prioritize paying their main mortgage over their investment property mortgage.

As a result, lenders charge a higher interest rate for investment property loans than for ordinary mortgages as well as setting higher barriers to qualifying.

Strategies to Secure Lower Investment Property Mortgage Rates

Before you settle on a lender, make sure to comparison shop for the very best investment property mortgage rate you can find for investment loans.

Take note that investment property mortgage rates are often 0.50 to 0.75% (sometimes 0.875%) higher than those for standard mortgages. And the lower your mortgage rate, the higher your profit margin on the property will be.

Making a larger down payment

You’ll get the best interest rate on an investment property with a down payment of at least 25%. As we’ve already mentioned, these rates are often 0.50 to 0.75% (sometimes 0.875%) higher.

That will vary by lender as well as your down payment, credit score, cash reserves, and DTI.

Improving your credit score

Take note that today’s average interest rates for investment properties are based on a prime borrower profile with a credit score of 740 and a 40% down payment.

If you have lower credit or a smaller down payment, your interest rate will likely be higher than what you see advertised. That’s why average rates should only be used as a benchmark.

Your investment property rate will differ, so be sure to compare quotes from a few lenders and find the best deal for you.

Reducing existing debt

Mortgage lenders know that investment property loans are riskier than loans for owner-occupied homes. That’s because if a borrower gets into financial trouble, they’ll prioritize paying their main mortgage over their investment property mortgage.

As a result, lenders charge a higher interest rate for investment property loans than for ordinary mortgages as well as setting higher barriers to qualifying.

Navigating the Process of Getting an Investment Property Mortgage

Pouring your money into real estate could be your golden ticket to building a hefty nest egg and waving goodbye to financial worries. Before you take the plunge, it’s essential to understand the current investment property rates available.

Knowing what kind of interest rate you can expect to pay on your loan—versus a standard conventional loan—will help determine whether the investment is worth it.

Preparing your finances

Before applying for an investment property mortgage, get your finances in order. Lenders will scrutinize your credit score, debt-to-income ratio, and cash reserves more closely than they would for a primary residence.

Aim for a credit score of at least 640, but higher is better. Keep your debt-to-income ratio below 36% and have at least six months’ worth of mortgage payments in cash reserves.

Researching potential lenders

Search for the best investment property mortgage rates and terms. Start with your current bank or credit union, but don’t stop there.

Compare offers from multiple lenders, including online lenders and mortgage brokers. Pay attention to interest rates, fees, and loan terms.

Understanding different types of loans available

There are several types of investment property loans available, each with its own pros and cons. Conventional loans are the most common, but they typically require a larger down payment and higher credit scores.

Government-backed loans, such as FHA loans, may have more lenient requirements but come with additional fees. Portfolio loans and hard money loans are also options, but they often have higher interest rates and shorter loan terms.

Comparing Different Types of Investment Property Mortgage Loans

When financing an investment property, you have several loan options to choose from. Every loan is its own beast, sporting a unique mix of requirements, interest rates, and conditions you’ll need to tackle.

Here’s a breakdown of the most common types of investment property mortgage loans:

Conventional loans

Conventional loans are the most popular choice for investment properties. They typically require a down payment of at least 20%, although some lenders may allow as little as 15%.

Interest rates for conventional loans are usually higher than those for primary residences, and you’ll need a credit score of at least 620 to qualify.

Government-backed loans

FHA and VA loans, backed by the government for those eyeing investment properties, come with their own set of extra hoops to jump through.

FHA loans require a down payment of at least 3.5% and a credit score of at least 580. VA loans are available only to eligible military veterans and active-duty service members.

Portfolio loans

Portfolio loans are offered by private lenders and are not sold on the secondary market. While these loans might not be as strict about their rules, they do make up for it by tagging on higher interest rates and extra fees.

Portfolio loans may be a good option if you don’t qualify for a conventional loan or if you need a loan with unique terms.

Non-warrantable condo loans

Non-warrantable condo loans are designed for condos that don’t meet the requirements for a conventional loan. Usually, these loans require a larger upfront payment and come with higher interest rates than standard loan choices.

If you’re considering purchasing a condo as an investment property, be sure to check whether it’s warrantable or non-warrantable.

Hard-money loans

Hard-money loans are short-term loans offered by private lenders. They’re often used by real estate investors who need to close quickly or who don’t qualify for a conventional loan.

Hard-money loans typically have higher interest rates and fees than other types of loans, and they often require a down payment of at least 25%.

Exploring Alternative Financing Options for Investment Properties

If traditional financing options don’t work for your investment property purchase, don’t give up just yet. There are several alternative financing options available for real estate investors.

Here are a few to consider:

• Private money loans: These loans are offered by private individuals or companies and often have more flexible requirements than traditional loans.
• Seller financing: In some cases, the seller of the property may be willing to offer financing to the buyer. This can be a good option if you don’t qualify for a traditional loan.
• Crowdfunding: Real estate crowdfunding platforms allow investors to pool their money to fund real estate projects. This can be a good option if you don’t have enough money for a down payment.
• Partnership: Partnering with another investor can help you share the costs and risks of purchasing an investment property.

Before pursuing any alternative financing options, be sure to do your due diligence and carefully consider the terms and risks involved.

FAQs in Relation to Mortgage Rate on Investment Property

What is the interest rate for an investment property?

Rates vary widely, but they’re typically 0.5% to 0.75% higher than those for primary residences.

What is the 2% rule for investment property?

This guideline suggests monthly payment rent should be at least 2% of the purchase price to ensure profitability.

Are mortgage rates lower for an investment property?

No, they tend to be higher due to increased risk lenders associate with rental properties.

What is the 50% rule in real estate?

The rule estimates that a landlord should expect operating expenses to eat up about half of rental income.

Conclusion

So there you have it—the straight scoop on getting better deals with the mortgage rate on an investment property. It’s not about fancy financial footwork or knowing some secret handshake; it’s about being informed, prepared, and strategic with your investments. 

Whether improving credit scores or negotiating like a pro, every step taken is another toward maximizing those returns. This journey through numbers might seem daunting at first glance but remember: every successful investor started somewhere.

They asked questions, made moves based upon solid advice—just like what we’ve covered—and kept their eyes fixed firmly on their goals. Keep pushing forward because when all is said and done? You’re not just buying properties; you’re building future opportunities.

Take the first step towards transforming your real estate dreams into reality with eFunder. Click here to schedule a personalized consultation and discover how we can help you secure the optimal financing for your next investment venture. Let’s build your success story together!

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