Investment Property Mortgage Rates: What You Need to Know Before You Buy

Are you eyeing an investment property to grow your wealth over the years? Investing in real estate can be an excellent strategy for achieving financial independence, but there’s certainly a lot to consider before you make such a serious decision. For instance, the current 30-year mortgage rate in the U.S. is around 6.43%, with expectations of a decrease in 2024. Do you know that, typically, rental property mortgage rates are higher by about 0.50-0.75%?

In this article, you will find out about current investment property mortgage rates, common types of investment loans, and the prospects of refinancing. 

What Factors Affect Investment Mortgage Rates? 

What are mortgage rates for investment properties? They are interest charges paid by investors to afford a property. One of the first things that investors wonder is how lenders determine investment property rates. 

Factors influencing rental property loan rates:

1. Credit Score: Lenders assess your credit score. Those with higher scores have more chances of getting better rate conditions. 
2. Debt-to-Income (DTI) Ratio: Your DTI ratio, comparing monthly debt payments to income, is considered. Investors who have lower DTI will be able to get lower rates. 
3. Down Payment: Making a down payment of 25% or more can reduce rates, as it lowers the lender's risk.

There are also additional factors. These may include changes to federal funds rate, employment rates, changes in tax laws, and stability of the financial market.

Types of Investment Loans: Pros/Cons and Rates 

There are four main types of investment loans that you may choose from that differ in interest charges and other requirements.

Conventional loans

This is the most common type. Mortgage brokers and reputable financial institutions commonly issue such loans. As of January 2024, the average 30-year fixed mortgage rate is 7.03%. 

Advantages: You get lower fees and rates compared to other investment property loans, but you need a good credit score. 

Disadvantages: A down payment starts at 15-20% of the purchase price, so you need to have a significant sum of money upfront. 

FHA loans

This is a type of loan backed by the Federal Housing Administration. If you are one of the investors considering a 2-4 unit property, it may be an option for you. The average 30-year FHA mortgage interest rate is 6.22% as of January 2024.

Advantages: A down payment is only around 3.5%, and the credit score requirements are lower. 

Disadvantages: You must live in your investment property for at least one year, which may not be suitable for some investors.

VA loans

As the name suggests, it is suitable for those who meet requirements related to military service. The average 30-year VA mortgage interest rate is 6.84% as of January 2024. 

Advantages: The possibility of getting a 0% down payment if you are eligible. 

Disadvantages: You have to live in a property for a year or more. 

Hard money loans 

If you have an eye on a specific investment and need your money right away, another option is hard money loans. 

Advantages: It’s easy to qualify for, and you will get your money quickly. Interest rates for hard money loans can vary, but the average is 10% to 18%. 

Disadvantages: Hard money loan rates for investment property are high, and the same goes for free. 

HELOC

Those who have equity in another property can consider a home equity loan or line of credit. They allow you to borrow against your equity to finance your investment property. 

Advantages: The loan is tax-deductible, and investment loan rates can be lower compared to some other types. 

Disadvantages: There is a risk of losing your property when you cannot repay the loan.

Compare Investment Home Loan Rates 

Finding the best rates might require patience, but think of it as an investment in itself — one that promises to pay off in the future.

There are plenty of sites that offer calculators for comparing loan rates on investment properties. With such tools, you will get an approximate idea of rates, but contacting lenders directly is more informative. 

Until you sign a closing document, you can collect as many loan quotes as you want. Numerous lenders provide the option of free pre-approval, so you should benefit from it to get the most accurate rates. 

When looking for a mortgage, you should avoid the following:

• Don’t rely on ads to get the best rates. Advertised listings won’t be relevant in your case, as they show only the lowest rates for investors who perfectly meet all conditions. 
• Avoid accepting the first offer. You should avoid rushing to accept the first offer at all costs, as you may be disappointed later when you find better rates. 
• Don’t choose your current bank for convenience. While it may seem like an easy solution, you should look beyond your current bank if they don’t offer great rates. 

Refinancing Investment Property: Why and How to Do This

Refinancing is done by investors to lower investment property loan rates. If you wonder whether refinancing your investment loan will be right in your situation, the advantages include the following:

• Reduced interest rates compared to the initial ones; 
• An opportunity to choose new loan terms during refinancing;
• Addition of more loan features;
• Using your equity for financing other investments; 
• Changing your fixed-rate interest to a variable one.

While the pros usually outweigh the cons, you should still remember the latter. The disadvantage of refinancing is that you will have to pay fees, so you should find out the exact ones beforehand. Also, you need to have a good credit score and provide serious proof of income. 

The process of refinancing an investment property is quite complex. 

Document Preparation

For refinancing, you are expected to provide:

• Tax returns from the past 2 years;
• W-2 forms;
• Relevant lease agreements for your investment property;
• Rental income information. 

Building equity

Another essential part is that you need some equity built. In many cases, you will need to have 25% equity or more in the property to qualify for refinancing. 

Correct DTI ratio

Before you apply for refinancing, you should take a look at your debt-to-income ratio. It needs to be 45% or less if you want to refinance your property. 

Proper property appraisal 

It is also essential that your investment property is professionally evaluated for its income potential and value. This is done to see whether the house has sufficient equity for refinancing.

Closing costs 

Refinancing requires paying closing costs, and the exact sum may differ depending on the property location and loan size. You should find out the closing costs beforehand, but the average is around $5,000. 

Final Thought

Mortgage rates for investment property can vary greatly depending on the chosen options, your credit score, a lender, and other factors. It is important to approach choosing mortgage rates for your future property responsibly, as the only way to lower them in the future is to apply for refinancing. Also, the process of refinancing can be costly. That’s why we recommend comparing numerous offers before making your decision.