What is investment property mortgage?

If you want to acquire an income-generating property, shopping around for the cheapest mortgage rates will help you maximize your investment. Check out today's investment property mortgage rates and learn how they are determined.

Current Investment Property Mortgage Rates

Mortgage rates have been falling in recent months, and they dropped even more last month, with 30-year mortgage rates average 6.05% in August. This is down 40 basis points from the previous month. Rates fell below 6% in September, the lowest level since early 2023.

Most significant estimates predict that mortgage rates will fall in 2024. If you want to buy an investment property, you might want to wait until later this year (or perhaps next year), or you could buy now and refinance when interest rates fall.

As you look at rates, keep in mind that investment property mortgage rates are typically higher than mortgage rates on primary residences or second houses.

The real estate market has been experiencing significant fluctuations in recent years, with the COVID-19 pandemic and subsequent economic recovery playing major roles. While mortgage rates have been on a downward trend, it's important to note that the market remains dynamic. Potential investors should closely monitor economic indicators, such as inflation rates and Federal Reserve policies, which can greatly influence mortgage rates. Additionally, local market conditions can vary widely, so it's crucial to research specific areas where you're considering investing to understand the potential for rental income and property appreciation.

Buyers who use a mortgage to purchase a property have three options for occupancy: principal residence, second house, and investment property. Your primary residence is your home, which you live in for the most of the year. A second home is one that you only live in for a portion of the time, such as on vacation.

Investment properties are properties owned solely to generate income, typically by renting them out on a short- or long-term basis. Investment properties are not owner-occupied, which means the owner does not live in the residence.

It's worth noting that the distinction between these property types can have significant tax implications. Investment properties may offer certain tax advantages, such as the ability to deduct mortgage interest, property taxes, and operating expenses from your rental income. However, these benefits come with added responsibilities and potential risks. Investors should consult with a tax professional to fully understand the tax implications of owning an investment property and to ensure they're maximizing their potential deductions while remaining compliant with tax laws.

Key Distinctions From Owner-Occupied Mortgages

Here's what you may expect when obtaining an investment property mortgage:

Higher interest rates: Because lenders consider these mortgages riskier, you will pay more in interest to obtain one.

Larger down payment requirements: Depending on the type of property, expect to put down at least 15% to 25%.

Stricter qualifying requirements: Lenders may request higher credit ratings for investment property loans. If you have debts on other properties, it may be more difficult to maintain an acceptable debt-to-income ratio.

Factoring in rental income: If you're purchasing a house to rent out, you might be able to use some of the revenue earned by that unit to help you qualify for a mortgage.

Overall, investment property mortgages are more expensive and difficult to qualify for than mortgages for borrowers purchasing a home to live in since they are regarded riskier loans.

Why are investment property mortgages considered riskier? If the borrower is experiencing financial difficulties, they are more likely to prioritize paying off their principal house. Investment properties also demand a significant amount of time and money to maintain. If the owner has difficulty locating tenants or ends up investing more money than they receive, they may decide to walk away.

The increased risk associated with investment property mortgages also stems from the nature of the rental market itself. Economic downturns can lead to higher vacancy rates and lower rental income, potentially impacting an investor's ability to meet mortgage obligations. Additionally, changes in local regulations, such as rent control laws or short-term rental restrictions, can affect the profitability of an investment property. Lenders take these factors into account when assessing the risk of investment property loans, which is why they typically require more stringent qualifications and offer less favorable terms compared to owner-occupied mortgages.

Factors That Affect Your Investment Property Mortgage Rate

Property Type

The specifics of the property you are acquiring can affect your rate. For example, if you buy a multi-unit structure rather than a single home, you may face a higher interest rate.

Location

Certain states have higher average rates than others. See how mortgage rates are trending in your state to get a better idea of what you might pay.

Downpayment Amount

Putting more down than the minimum necessary will help you get a cheaper mortgage rate.

"A homebuyer looking to purchase an investment property should account for a 20% to 25% down payment to get a competitive rate," says Raul Hernandez, a mortgage broker at reasonable Home Lending.

Loan Term

Shorter loan terms have cheaper rates than longer durations. For example, a 15-year mortgage costs less than a 30-year mortgage.

Your Financial Profile

The stronger your overall financial profile, the higher your chances of getting a good rate.

To maintain your rate as low as possible, work on increasing your credit score, lowering your DTI, and saving for a larger down payment.

According to Hernandez, you can qualify for an investment property mortgage with a credit score as low as 620. However, people with poorer credit ratings will have to make a larger down payment and pay more in interest, he says.

Another crucial factor that can influence your investment property mortgage rate is your experience as a real estate investor. Lenders often view first-time investors as higher risk compared to seasoned property owners with a proven track record of successful rentals. If you're new to real estate investing, you might consider partnering with an experienced investor or seeking additional education in property management to strengthen your application. Some lenders also offer slightly better rates to borrowers who have cash reserves to cover several months of mortgage payments, as this demonstrates financial stability and reduces the risk of default in case of unexpected vacancies or repairs.

Where To Find Investment Property Lenders

Many local and national mortgage institutions will make loans to investment property buyers and owners. Chase, for example, is one of our top mortgage lenders and provides investment property loans. If you're interested in a lender, phone them or check their website to see if they provide these types of loans.

If you're seeking for an investment property loan lender with more liberal standards, consider non-QM lenders.

Because they are smaller, local banks and credit unions are generally a better option for more personalized assistance. They may also be able to provide better rates, so shop about.

If you don't want to shop around yourself, you can hire a mortgage broker. Brokers will let you compare many lenders at once, allowing you to effortlessly shop rates and locate the best loan for your circumstances.