Current Interest Rates For Rental Property

Aug 25, 2022 | Mortgage Guides

Stay Informed: Current Interest Rates for Rental Properties

Investing in rental properties can evolve into an income that generates long-term wealth. As lucrative as an investment property and rental cash flow might be, qualifying for such a loan is more extensive than financing a primary residence. One significant difference is the interest rate, which is often higher.

 Like all investments, buying this type of property carries a level of risk. The guide below examines rental property mortgage rates and discloses steps borrowers can take to improve their odds of eligibility by satisfying the stringent requirements of investment loans.

Start Your Homebuying Journey Today with Wesley Mortgage

What Are Rental Property Interest Rates?

The interest lenders charge for rental properties are known as investment property mortgage rates. Like other loans, a borrower’s financial portfolio—their credit standing and accessible cash—determines this rate. However, with an investment property loan, stakes are raised, leading lenders to boost interest rates to reduce the inflated risk. In short, the higher the credit score and the larger the down payment, the better the chance of landing the best rates.

Comparing Mortgage Rates Between Conventional and Investment Property Loans

Due to the additional risk that a rental property poses, investment loan rates are higher than an owner-occupied mortgage. If buyers rely on rental income to cover the property’s mortgage, there is a greater chance of loan default.  

To balance out the gamble of investors and prospective tenants, rental property lenders often impose loftier rates. The riskier the loan, the more they increase the rates. On average, investment property loan rates are increased by 50 to 87.5 basis points compared to traditional home loan rates.  

What Are the Loan Options for Purchasing a Rental Property

With investment property financing for rentals, borrowers have various loan options, including:

  • Conventional investment mortgage: The most common form of financing for rental properties. Like traditional home loans, albeit with higher interest rates and increased down payment requirements. 
  • Government-backed mortgage: Those eligible for FHA or VA loans can consider this option for a lower down payment. The only catch is that it has to be a multi-unit property with the borrower living in one of the units.
  • Home equity loan or line of credit (HELOC): Utilize the built-up home equity to fund a rental property mortgage, even covering the down payment. Note that this alternative places the primary residence as collateral.
  • Bridge loan: Another short-term loan, this option allows buyers to make a contingency-free offer on a rental property and provides financing during a transitional period.
  • Portfolio loan: Lenders offer these with adjustable features. Depending on the borrower, that could mean less money down or the ability to finance multiple properties. Keep in mind that loan flexibility comes at the cost of higher rates. 
  • Hard money loan: This type often has high fees and rates unsuitable for most investments. However, these short-term loans are beneficial when needing a fast financing process.
  • Cash-out refinances: Similar to tapping into home equity, refinancing allows borrowers to take out a new mortgage that exceeds their current loan and then withdraw what’s left over in cash.
  • Owner financing: Also known as seller financing, this option benefits owners with future cash flow without the burden of acting as a landlord. While cheaper than traditional banks and brokers, expect increased mortgage rates.

 As an alternative, some creditors offer commercial residential property loans that can be used for housing and apartment buildings when other options are unavailable. Commercial loans are more complex to establish but still an option as long as the rental income exceeds the mortgage expenses. 

What Affects Rental Property Interest Rates?

Mortgage companies play a significant role in the interest charged. Part of the nation’s housing finance system, the Fannie Mae and Freddie Mac enterprises set standards for most mortgages, including the terms and fees. They charge higher prices for investment properties due to the elevated risks, which evolve into lenders raising interest rates to comply with the guidelines.

 Further considerations affect rental property mortgage rates, such as the borrower’s credit score, debt-to-income ratio (DTI), loan-to-value ratio (LTV), and cash reserves. Compared to buying a home to live in, rental property loans have stricter qualifications, making reasonable rates on investments challenging to attain. 

Credit Score Requirements

Lenders require a higher credit score for borrowers financing rental properties. For example, conventional loan borrowers can get approved for a home with a 620 FICO score. In contrast, investment loan borrowers need a score of 640 or higher. And that’s not even for a competitive rate, just the minimum. 

If eligible, FHA loans are worth consideration for those with less-than-stellar credit. The underwriting is less extensive, and credit score requirements begin as low as 580. However, the property must remain a primary residence. That limits it to a multi-family home where the owner can rent the other units. 

Down Payment Requirements

Increased down payment requirements are one more risk management measure creditors use when approving loans for real estate investing. The necessary down payment amount depends on the borrower’s DTI ratio, LTV ratio, and the type of loan.

 Conventional rental properties require between 15 and 25 percent of the purchase price. That’s a sizable down payment compared to the mere three percent needed for a primary home. Government-backed loans avoid down payment increases—remaining at 3 1/2 percent for FHA and zero down for VA and USDA—yet their inflated interest rates make up the difference in the long run. 

Other Rental Property Requirements

When applying for a rental property loan, lenders examine your qualifications as a prospective landlord in several aspects. A history of home ownership is critical, and first-time real estate investors should expect eligibility difficulties. Depending on the loan, there are other prerequisites (i.e., cash reserves in the bank) and restrictions (i.e., a limit on the number of rental properties).

These conditions can sway the mortgage rates for investment. Since they are not official guidelines, details vary with each lender. Ask the loan officer about such accessories before purchasing. 

How to Lower the Loan Interest Rates for Rental Properties

To enhance one’s odds of receiving the best mortgage rates on a rental property loan, below are a few approaches: 

Improve Creditworthiness

Investment property rates are sensitive to a borrower’s credit score. The best practice is to build and maintain a solid score before applying to result in valuable conditions, like a lower monthly payment. Such benefits allow investors to offer better rental rates and generate more cash flow. A 640 may be the minimum credit score for investment properties, but a score above 700 delivers buyers more profitable rates.

Increase the Size of the Down Payment

The surest way to lower an investment property’s interest rate is to make a larger down payment. Many expenses get eliminated by paying at least 20 percent down. It might be worth looking into borrowing against the equity of a primary residence or finding a less expensive property to contribute more with the initial deposit and save more with lower rates. 

Pay Off Existing Debt

After comparing monthly debt against monthly gross income, an investor’s DTI ratio should not surpass 43 percent. Mortgage payments on a rental property require more funding, so starting with minimal debt pays off with reduced rates. When calculating DTI, lenders also account for a percentage of the projected rental income—and budget for additional costs, such as property taxes, homeowners insurance, maintenance, etc.

Save More in Cash Reserves

After paying the down payment and closing costs, creditors still mandate cash reserves as liquid assets. For investment home loans, proof of six months to a year’s worth of mortgage payments is required. These additional funds demonstrate your ability to pay for the rental property despite a vacancy.

Shop Around

Studies have shown that home buyers who complete several loan applications are less likely to receive high rates. Comparing interest rates between three to five separate lenders is ideal, as competition tends to reduce quotes. 

Today’s Rental Property Rates

Since rental properties fall under the investment category, they present greater risk, which is reflected in their higher interest rates. Still, a rental property can pay dividends. A higher mortgage rate may be inessential based on the asset’s return on investment significance.

 The best way to determine rental property rates is by obtaining multiple quotes. Mortgage rates always shift, so contacting by phone or online is the quickest approach to gather and compare rates. Contact a Wesley Mortgage representative today to learn more.

Start Your Homebuying Journey Today with Wesley Mortgage

View Floor Plans and Get Prequalified For A Home Today

Brian/DestinyHomes

First Name(Required)
Last Name(Required)

View Floor Plans and Get Prequalified For A Home Today

Dalton/Ardent

First Name(Required)
Last Name(Required)

View Floor Plans and Get Prequalified For A Home Today

Emily/Parkside Form

First Name(Required)
Last Name(Required)

View Floor Plans and Get Prequalified For A Home Today

Samantha/SmithDouglas

First Name(Required)
Last Name(Required)

View Floor Plans and Get Prequalified For A Home Today

Brittney/SignatureHomes

First Name(Required)
Last Name(Required)