Here’s what you really want to know: The best investment property mortgage rates for online applications is from Rocket Mortgage, which we go into more detail in a bit. We’ll also talk about the best investment property mortgage rates for pre-approval (Better Mortgage) and the best investment property mortgage rates for low rates (SoFi).
In this post, we’ll explore what is an investment property mortgage; investment loan pros and cons; the tax benefits of investment properties; and why interest rates are higher on investment and rental properties. We also go into more detail about the best mortgage rates for your specific needs.
We have a rating model called the SimpleScore that evaluates lenders so you can assess the best financial products for you by comparing apples to apples. We have five criteria that we look at: perks; hard and soft credit checks; customer satisfaction; product variety; and fees. We go into more detail about this scoring model at the bottom of this post and how it can impact your decision.
Current mortgage rates
According to Bankrate’s latest survey of the nation’s largest mortgage lenders, these are the current refinance average rates for a 30-year, 15-year fixed and 5/1 adjustable-rate mortgage (ARM) refinance rates among others.
|30-Year Fixed Rate||3.050%||3.270%|
|30-Year FHA Rate||2.850%||3.700%|
|30-Year VA Rate||2.660%||2.840%|
|30-Year Jumbo Rate||3.070%||3.170%|
|20-Year Fixed Rate||2.950%||3.150%|
|15-Year Fixed Rate||2.350%||2.650%|
|15-Year Fixed Jumbo Rate||2.350%||2.420%|
|5/1 ARM Rate||3.150%||3.990%|
|7/1 ARM Rate||3.180%||3.880%|
|7/1 ARM Jumbo Rate||3.360%||3.850%|
|10/1 ARM Rate||3.420%||4.090%|
Rates data as of
Best investment property mortgage rates of 2021
Best investment property lenders of 2021
|Lender||30 Year Fixed APR||Eligibility Criteria||Key Benefits|
|Rocket Mortgage||3.42%||620||Flexible options and easy application|
|Better Mortgage||Varies||620||Streamlined application and no commission fees|
|New American Funding||3.18%||620||Wide variety of mortgage types|
|Navy Federal Credit Union||2.34%||varies||Low rates and no prepayment penalties|
|PNC Bank||Varies||620||Online savings tools and resources|
|SoFi||Varies||660||Easy application and competitive pricing|
|Guaranteed Rate||Varies||580||Neighborhood data and local experts|
What is an investment property mortgage?
Investment property mortgages are mortgages that individuals take out on properties that they plan to rent rather than live in. These residences are known as investment properties. Investment property mortgages tend to have higher interest rates than traditional mortgages, and they may have stricter eligibility requirements. This is because investment properties present more of a risk to potential lenders, since property owners are more likely to stop payments on an investment property mortgage than on the mortgage for the house that they actually live in. Property owners may also have trouble paying an investment property mortgage if they struggle to find tenants to rent the house or apartment.
Investment loan pros and cons
There are a number of good reasons to buy investment property with an investment loan, and there are also some reasons you may want to think twice about doing so.
Some of the pros for buying investment property with an investment loan include:
- Flexible lending parameters for the size and type of property — You can get an investment loan for different types and sizes of properties. If you want to buy an entire apartment building and can meet the requirements for approval, for example, you can. That’s not always possible with a regular mortgage loan, which are generally geared toward single-family houses or duplexes. In other words, these loans open up more options for the types of property you purchase.
- Option to take out multiple loans — You can easily have two, three or four investment property loans at once if a lender will approve you. However, you can’t usually have multiple purchase loans in your name for single-family home purchases that you’d be expected to live in. The only way this is possible is with an investment property loan.
- Potential profit from the investment — Without a property loan, you’d have a hard time getting funding for an investment property. You’d probably have to pay cash for your investment. With the help of an investment loan, you have the option to buy an investment property and make a profit from the rental, leasing or sale of your investment property.
There are also a few cons to investment property loans. These include:
- Stricter lending parameters — There’s a higher risk of default with investment loans, so you’ll have to meet the strict lending requirements for an investment loan. That could mean a higher credit score, more cash in your reserves or a number of other requirements.
- Higher interest rates — Investment loans come with higher interest rates due to the increased risk to the lender. In turn, you’ll pay more on the interest for an investment property loan. This isn’t ideal for maximizing your profits.
- Higher down payment — Most investment property loans require you to put down a hefty sum of cash for your loan. While you may be able to get away with 3.5% on some home purchase loans, you’ll likely have to cough up 25% to 30% or more to obtain an investment property loan. This can put these loans out of reach for some buyers.
The tax benefits of investment properties
Investment property owners could help you reap big benefits during tax season. The IRS notes few deductions that could add up in your favor if you own an investment property or two, including rental property repairs, maintenance, depreciation and property tax. You may also qualify for write-offs on necessary expenses for your property, such as advertising or listings, insurance and utilities. Writing off these, and other investment property expenses, could total up to $25,000 in tax deductions if you’re lucky.
Investment property owners may also deduct travel expenses that were paid to handle repairs. You’ll be able to deduct gas, meals, shipping and even tips paid on meals or services. Just make sure all travel expenses meet the criteria outlined in the Travel, Gift and Car Expenses outlined by the IRS.
You’ll need a few documents to accurately document your deductions. Be sure to keep copies of receipts from any upkeep or repairs, and keep all financial records of your rental income, too. The more paperwork you have, the better — just in case you’re audited.
The IRS does note, however, that tax deductions don’t apply to rental improvements or upgrades. You’ll see a return on your investment through the depreciation deduction instead, or you can use Form 4562 to file for any exceptions.
If you face any rental losses, you can also deduct up to $25,000 when it’s tax time. You’ll just need to own 10% of the property and handle the majority of the rental management, such as new tenants and leases.
Why are interest rates higher on investment or rental properties?
Interest rates are higher on investment properties because the risk of default is greater. There’s a gamble when buying an investment property — you’re banking on it making enough money to cover the costs. That doesn’t always happen, and buyers can’t always afford to carry the properties long term if they remain unoccupied or unsold (in the case of flips), which means you’ll pay more for the privilege of taking out this type of loan.
This includes a higher rate on your loan. Owner-occupied properties have a much lower risk of default, which is why it’s safer for lenders to offer lower interest rates. Lower risk equals lower rate. Higher risk equals higher rate.
How should I choose the right investment property mortgage?
Finding the right investment property mortgage will depend on your financial situation and what loans you qualify for. In general, you should look for mortgages with low interest rates and few fees. If you plan on buying a multi-unit property and living in one of the units, you may also qualify for an FHA loan or a VA loan, as long as the property has a maximum of four units.
Do you have to put 20% down on an investment property?
No — you won’t have to put 20% on an investment property. You’ll probably have to put down more than 20% to get your loan approved. If you’re buying a single-family residence as an investment, you may be able to find a lender that lets you put down 15% to 20%, but if you’re trying to buy a multi-family unit, expect to cough up at least 25% to 30% as a down payment to get approved.
This is again because the risk to the lender is greater on certain types of investment properties. They aren’t always as quick to sell or be rented out as many investors would hope, making it easy to get buried under an investment you can’t afford.
Other financing for investment properties
If you’re buying a single-family home as an investment, you may be able to get a conventional loan to fund the purchase of the property. You’ll likely have to put more down to obtain a conventional loan on an investment property, though, and your debt-to-income ratio will also factor in like it did when you purchased your home. Keep that in mind when you’re considering this route.
Fix or flip loans
If you’re planning to flip a home after updating and rehabbing it, you may be able to get a fix-and-flip loan. This is a short-term loan that allows you to fund renovations before putting the home back on the market as quickly as possible. This type of loan isn’t appropriate for buyers who want to purchase and then lease out apartments or duplexes. It’s limited to flippers who buy cheap and sell high after fixing up the property. These are basically hard money loans that are secured by the property, and specialized lenders or some crowd-funding platforms offer them.
Use your home equity
Do you own a home with lots of equity? You can use the equity in your home as a source of funding for an investment property. Most lenders will let you borrow up to 80% of your equity, so if you’ve paid down your home significantly and want to purchase an investment property with a price tag that fits in that range, this is an option. You can tap into your equity via a cash-out refinance or home equity loan, which most traditional lenders offer.
We welcome your feedback on this article and would love to hear about your experience with the investment property mortgages we recommend. Contact us at firstname.lastname@example.org with comments or questions.