How Investment Property Mortgage Rates Differ From Conventional Mortgage Rates

What Are Investment Property Mortgage Rates?

Mortgage rates for investment properties are generally 0.25% to 0.875% higher than traditional mortgage rates because investment properties pose more risk to the lender. Although you can buy an investment property using the same type of mortgage you’d use to buy a primary home, lenders generally charge higher interest rates for investment property mortgages because they’re taking on more risk.

Among the risks for lenders:

• If you can’t find a tenant for the property right away, you may struggle to pay the mortgage without the rental income.
• You might lose your job and be forced to choose between making payments on your primary home loan and your investment property loan.
• The value of the home you plan to flip could drop, or flipping could turn out to be more effort (and cost) than it’s worth.

Lenders are aware of all these possibilities and know they could be left in the lurch if you default on your loan.

Compare Mortgage Rates

The rates below are for mortgages on owner-occupied properties, not exclusively investment properties, which often have higher interest rates. Adding 0.25% to 0.875% to the rates below can give you an estimate of what you might pay for an investment property mortgage.

Source: Curinos LLC, December 2, 2024; assumes a 720 FICO Score and a $350,000 mortgage

What Is a Good Investment Property Mortgage Rate?

A good mortgage interest rate for an investment property is one that allows you to comfortably afford a mortgage and all the other expenses of property ownership, such as property taxes, insurance and maintenance. Today’s average mortgage interest rates may seem high compared with a few years ago: In November 2020, rates for a 30-year fixed mortgage hovered below 3%. But today’s interest rates look much better if you compare them with October 1981, when average rates for a 30-year fixed-rate mortgage hit 18.44%.

The Federal Reserve lowered the federal funds rate in September 2024 and did so again in November 2024. If the Fed lowers the rate again at its next meeting in December, as many experts expect, it could reduce the cost of borrowing and may reduce mortgage interest rates. If mortgage rates decline by 0.25%, for example, you could save $250 in interest annually for every $100,000 you borrow.

Should you postpone purchasing an investment property until rates drop? Waiting for a lower interest rate isn’t always a good idea. Falling mortgage rates could spur homebuyers who’ve delayed purchasing to enter the market, driving up demand—and home prices. In this scenario, it could make more sense to buy your investment property now and refinance the loan later if interest rates go down.

Factors That Affect Investment Property Mortgage Rates

Interest rates on an investment property mortgage depend partly on the general economy, but factors you have more control over also play a role. These include your:

• Credit score: Although lenders’ requirements can vary, in most cases you’ll need a credit score of 620 or higher to get a conventional mortgage for an investment property. The higher your credit score, the better; higher scores usually translate to lower interest rates.
• Credit report: In addition to checking your credit score, lenders will examine your credit history for warning signs that you may be a poor credit risk, such as previous foreclosures or bankruptcies.
• Debt-to-income ratio (DTI): This figure expresses your monthly debt payments (including the desired mortgage) divided by your gross monthly income. Mortgage lenders usually calculate a front-end DTI showing what percentage of your gross monthly income goes toward housing costs; they typically want this to be between 28% and 35%. They’ll also calculate a back-end DTI, which expresses how much of your gross monthly income goes toward all debt payments; they usually expect this to be between 36% and 43%. Lower DTIs can reduce your mortgage interest rate.
• Down payment: Lenders generally require a down payment of at least 20% to buy an investment property; some may require as little as 15%, however, while others want as much as 30%. Making a higher down payment reduces the lender’s risk, which can help lower your interest rate.
• Employment history: Lenders like to see a history of steady employment. This indicates you’re likely to have reliable income going forward, which could help reduce your interest rates.
• Assets: In addition to income, lenders may evaluate your assets. Having a solid financial cushion can help you pay the investment property mortgage, reducing the likelihood of default.
• Loan term: You can typically opt for a 15-, 20- or 30-year mortgage repayment term. Longer loan terms usually translate to higher interest rates and lower monthly payments. You can generally get a lower interest rate by selecting a shorter loan term, but your monthly payments will be higher.
• Interest rate type: Fixed-rate mortgages have the same interest rate for the life of the loan. Adjustable-rate mortgages (ARMs) have interest rates that change with market conditions. ARMs usually offer lower interest rates than fixed-rate mortgages to begin with, but rates can rise substantially in the future.
• Location: Lenders may charge different investment property mortgage interest rates depending on where the property is located. For example, buyers in an area with a weak economy might be considered higher risks and have to pay higher interest rates.

Pros and Cons of Investment Property Mortgages

There are benefits and downsides to getting a mortgage for an investment property.

Pros

• Property can pay for itself (and then some): Once you rent out your investment property, the rental income may cover part or all of the monthly mortgage payments. If you successfully flip the property, you can use proceeds from the home sale to pay off the mortgage and keep the rest as profit.
• Builds equity: As you pay down the investment property mortgage, you’ll gain equity in the property, helping to build wealth. You can even borrow against your equity, potentially using it to buy more investment property.
• May offer tax benefits: Mortgage interest and property taxes for an investment property may be tax deductible. You may also be able to deduct expenses such as maintaining or repairing the property, insurance and advertising for tenants.
• Diversifies your portfolio: Because real estate prices usually don’t fluctuate as frequently as stock prices, buying property can add stability to your portfolio, diversifying your investments.

Cons

• Higher interest rates: Compared to mortgage loans for a primary home, investment property mortgage loans generally charge more interest.
• Large down payment required: It’s possible to get a mortgage for a primary residence with low or no down payment. Investment property mortgage loans generally require at least a 15% down payment, and some require as much as 30%.
• Property may not generate income: If you can’t find a tenant for your rental home, or if remodeling your flip takes longer than expected, you could end up paying the investment property mortgage longer than planned. This could strain your budget, especially if you’re making mortgage payments for your primary residence at the same time.

The Bottom Line

Investment real estate can be a lucrative income source. If you plan to finance your purchase with a mortgage, monitoring investment property mortgage rates can help you choose the best time to buy. You typically need a FICO Score of at least 620 to get a mortgage; however, a higher score may help you qualify for lower interest rates.

Check your credit score before applying for a mortgage to see where you stand. If your score needs sprucing up, you can help improve it by paying down debt, avoiding new credit applications and paying bills on time. Saving up for a larger down payment can also make your loan application more appealing, boosting your odds of getting approved for an investment property mortgage.