Investment and rental property mortgage rates: 2022 guide

How much higher are mortgage rates for investment properties?

If you’re considering an investment property, it’s important to know that mortgage rates for those tend to be higher than loans for a primary residence. Historically, loans for investment properties are riskier, so lenders charge higher interest rates. Lenders may also charge higher fees and have stricter underwriting guidelines for these loans.

Investment property mortgage rates tend to be 0.25% to 0.75% higher than those for a home you'll live in. Patrick Stoy, president and senior mortgage advisor of MC Mortgage Group in Wilmington, North Carolina, said that investment property spreads are the highest he's seen in his 23 years in the mortgage business. "Right now, rental property rates are averaging around 1.5% higher than a conventional 30-year fixed loan with 20% down," he said.

Factors that affect investment property interest rates

When you’re applying for an investment or rental property mortgage, it pays to understand which factors can affect your loan interest rates. Each lender may weigh these factors differently, so shop around to find the best mortgage for your needs.

• Credit score: Borrowers with higher credit scores tend to qualify for lower mortgage rates. Some loan programs require minimum credit scores.
• Cash reserves: Cash reserves are the money you have access to if you need to pay for repairs, make mortgage payments or cover other expenses. Lenders prefer that you have at least six months’ worth of mortgage payments saved for a property. The higher your reserves are, the lower the risk of your loan is.
• Loan-to-value (LTV) ratio: The lower your LTV ratio, the less risk there is for the lender. You may qualify for a better interest rate by having a larger down payment on a new property or borrowing a smaller amount against your equity if you’re refinancing a property you already own.
• Debt-to-income (DTI) ratio: A lower DTI ratio means you have more disposable income to cover your monthly obligations. This means you present less risk to the lender. Paying off debt to lower your DTI ratio can help you secure a better interest rate.
• Property types: Different property types carry different risk levels. Borrowing from a lender specializing in your property could get you a better interest rate.

Ways to get a lower rate for your investment property

You can qualify for a lower interest rate by doing the following before applying for your investment property mortgage. Some of these steps take time, so begin as early as you can.

• Improve your credit score. Avoid unnecessary credit inquiries, keep revolving balances low and make all payments on time to increase your credit score. Borrowers with higher credit scores often qualify for the best interest rates and terms.
• Reduce or eliminate other debt payments. You can improve your DTI ratio by reducing your credit card and line of credit balances and paying off other loans. Lowering your DTI ratio can qualify you for a better interest rate and make you eligible for certain loan programs.
• Make a bigger down payment. A bigger down payment reduces the loan’s LTV ratio and may qualify you for lower interest rates. Additionally, a smaller loan means a lower DTI ratio, which can help you qualify for the best rates.
• Shop around and compare rates. Different lenders have different qualifications and ideal customer types. Plus, not all lenders offer all loan programs. Shop around to find a lender with programs that meet your borrowing needs and competitive rates and fees.
• Choose a variable-rate loan. Variable-rate loans often have lower starting interest rates than fixed-rate mortgages. They’re best for investors who plan on refinancing or selling the property within a few years.
• Boost your cash reserves. Increase your cash reserves by selling assets, reducing expenses or other strategies. The more you can build your cash reserves, the better the loan programs you may qualify for.

Different types of rental property mortgages

Not all rental property mortgages are created equal. There are different types of mortgages based on the type of property you're borrowing against and your financing needs. These are the most common rental property mortgage types:

• Conventional loans
• Government-backed loans
• Down-payment assistance programs
• Hard money loans
• Blanket loans
• Portfolio loans
• Commercial loans
• Seller financing

Some investors use a home equity line of credit (HELOC) against their primary residence or a margin loan against their investments to purchase or finance their investment properties. These strategies minimize the average cost and time it takes to qualify for a typical mortgage to buy a property. In a competitive market, that can give you an advantage over other bidders.

Bottom line

There are significant differences between buying an investment property and buying a primary residence. One of the most important is mortgage rates, which impact your ability to get approved, the monthly payment and the property's profitability. Fortunately, you can take steps to secure the best mortgage interest rate for your rental property, such as shopping around with multiple lenders and exploring different types of loans that can meet your needs.