Today’s mortgage rates for investment properties

Mortgage rates on investment properties are higher than rates for primary residences, generally a percentage point higher compared to conventional loan rates for the latter. 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 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.

Lenders view investment properties as risky compared to primary residences. If you plan to rely on the rental income from a tenant to contribute to (or cover) the mortgage payments for the investment property, there’s a greater possibility you could default on the loan if your tenant fails to pay rent.

There’s also the reality that the U.S. mortgage system is set up to encourage primary homeownership through government-sponsored and government-backed loans. Fannie Mae, Freddie Mac, the Federal Housing Administration and the U.S. Department of Veterans Affairs all focus their lending efforts on primary homeowners.

Investment property loans vs. conventional loans

When comparing investment property loans and conventional loans, you’re often really comparing two types of conventional loans: one for an investment property and one for a primary residence.

The majority of mortgage lenders offer an investment property loan product that’s simply a conventional loan — in other words, not government-backed — but with stricter borrower qualifying requirements. An investment property loan lender might require a down payment of at least 15 percent, for example, while a conventional loan for a primary residence usually only requires 3 percent down.

Here are key points to know:

How to get an investment property mortgage

Here are some tips to get an investment property loan at the best possible rate:

1. Get your credit and down payment in order: Well in advance of applying for an investment property loan, take steps to improve your credit score or maintain an already-strong score and organize the funds for a down payment and closing costs. In general, lenders give the best rates to borrowers with a credit score of 740 or higher and a higher down payment than the lender’s minimum requirement.
2. Take stock of debt: Now’s the time to pay down or pay off debt and understand your debt-to-income (DTI) ratio, which impacts the interest rate on your loan. If you own more than one property, your lender will want to know about any mortgages on it. Ditto for debt like a car loan or student loan. If you plan to buy the investment property through an LLC, your lender might want to see paperwork tied to the business, too.
3. Compare rate quotes and get preapproved: When you’re ready to look for properties, get rate quotes from at least three mortgage lenders. These might include a community bank, credit union or a lender you’ve done business with previously. A mortgage broker can also help you find the right loan. (Make sure the lender or broker is licensed to operate where you plan to buy.) Consider the APR, or annual percentage rate, which reflects the interest rate and any lender fees and points. Once you settle on a lender, get a preapproval.

Types of investment property mortgage loans

• Conventional loans: These widely-available mortgages are offered by banks, credit unions and other lenders, who typically resell them to Fannie Mae or Freddie Mac.
• Portfolio loans: Some lenders offer portfolio loans, which are not sold to secondary market investors but instead held in the lender’s portfolio.
• DSCR loans: A type of non-QM loan, debt-service coverage ratio (DSCR) loans are underwritten based on the income generated by the investment property.
• Non-warrantable condo loans: If the investment property is a condo, your best option could be this type of specialty mortgage.
• Hard money loans: These are short-term, higher-interest loans provided by private lenders or investors.

Pros and cons of investment property mortgages

Pros of investment property loans

• You can borrow more compared to a conventional conforming loan. Investment property mortgages don’t have set loan limits, unlike conforming loans.
• You don’t have to live in the property. Unlike a loan for a primary residence, you don’t have to live in the property to get an investment property loan.
• You can deduct mortgage interest. If you itemize your tax return, you can deduct mortgage interest, as well as other rental expenses.

Cons of investment property loans

• You’ll have a higher interest rate compared to a loan for a primary residence. Investment property mortgages are riskier for lenders. Added risk translates to higher interest rates.
• You’ll need to meet stricter underwriting requirements. When compared to a mortgage for a primary residence, investment property mortgages often require more cash reserves, a better credit score and a higher down payment.