Rental property mortgage rates can range from 50 to 200 basis points (0.5 - 2.5%) higher than rates on a primary, owner-occupied home. For example, if the rate for a 30-year mortgage on a primary residence is averaging 4.50%, you might expect a 30-year investment property mortgage to have a rate of 6.0%.
Rates and down payment for each loan type
Conventional Mortgages Rates for Rental Properties
Many first time investors explore conventional mortgages initially when applying for rental property loans. You can certainly check with the big banks or your local credit union, but you may encounter more restrictive lending guidelines and lengthier closing timelines.
Keep in mind that most conventional lenders will qualify you based on your W2 income and tax returns. You can not use an LLC or bank statements to obtain a conventional loan for a rental property. Most conventional lenders will also challenge most 1099/contractor income and also only allow four active mortgages on your credit report.
Today’s Conventional Rental Property Mortgage Rates:
- 15-Year Fixed-Rate Loan: 5.99% – 7.50%
- 30-Year Fixed-Rate Loan: 6.25% – 7.75%
Down payment Required:
- Good for 1st time investors purchasing a property that is in good condition
- Reasonable interest rates
- High credit score requirement; most conventional lenders will require a score of at least 625 or higher
- Not ideal if you plan to buy 5 or more rentals; most lenders only allow four mortgage loans on your credit report
- More stringent qualification and underwriting
- Lengthy closing process of at least 5 weeks
Hard Money Loan Rates
If you want to buy a property under an LLC, big banks like Wells Fargo won't be a fit. For this reason, many individual investors explore hard money lenders. This also allows you to expand beyond 5 rental properties if a traditional bank limits the number of properties on your credit report.
Often times, investors want to purchase rehab properties but can't obtain loans from credit unions or traditional banks due to the condition of the home. Many hard money lenders also offer short-term purchase-rehab loans for buying and renovating distressed properties. Investors using the BRRRR strategy can often refinance their hard money or pursue a cash-out in order to scale their purchase of additional rentals.
Today’s Mortgage for Rental Property Rates:
- Adjustable Rate Mortgages (ARMs): 6.5% – 8.0%
- 30-Year Fixed Interest Loans: 6.75% – 9.5%
- 12 month "Fix & Flip" Loans: 7.0% – 12%
Down payment required:
- Often allow DSCR (debt service coverage ratio) loan criteria for underwriting rather than income
- Scalable: no limit on the number of mortgages
- May not report to the credit bureaus depending nature of loan
- Allow loans to LLCs and other legal entities
- Quick closing as fast ast 14 days
- Often no W2 income documentation required by some lenders
- Allow purchase-rehab loans
- Lending fees are higher. Hard money providers often charge a fee at closing (for example 1% of the loan amount).
- Often higher rates (100 - 250 basis points) than conventional mortgages
- Good credit required; most require a score of at least 600
- Depending on the state where the property is located, you may be required to use an LLC
Owner-Occupied Multifamily Loan Rates
Investors generally can not consistently obtain rates that you might get as a first time home buyer and owner occupant. But house hacking provides a path to obtain an owner occupant rate if your lifestyle allows you to live and rent a duplex, triplex or quad.
This is a great strategy to obtain a homeowner-style mortgage and the only requirement is that you live in the property for at least 1 year. You'll need to sign an affidavit of occupancy that states you plan to reside in the home.
Here's how it works: you buy a 2-4 unit building and move into one of the units. You rent out the other units - either under a 1 year lease or even as an Airbnb.
Down payment required:
- As low as 3%
- Lower interest rate
- Lower down payment requirements
- You must reside in the property for at least 1 year
- Multi-family homes are difficult to find
- Multi-family properties are more expensive than single-family
Why are interest rates higher on rental properties?
Interest rates are typically higher on an investment property because the loan is riskier for the lender. Banks understand that you're less likely to allow your primary residence to go into foreclosure due to missed payments. Vacancies, economic conditions, repairs, damage, etc. can all influence the risk level of a rental property over time. According to the banks, these factors do not impact your primary residence.
In addition to paying higher investment property interest rates, it’s likely you’ll have to make a higher down payment. For example, a first time homebuyer can qualify for a 3% down payment on their first home. And you can also buy a vacation property for 10% down in most cases. In contrast, rental property mortgages generally require at least 20% down in order to provide the lender with more equity in the transaction on the front end.