Real estate investments can be a lucrative path to financial freedom if financed correctly. Acquiring an affordable, low mortgage rate for an investment property is much different than financing your primary residence.
Here’s everything you’ll need to know about mortgage rates for investment properties.
Investment Properties Have Higher Mortgage Rates
When it comes to purchasing an investment property, the financial rules are much different than they are for buying a primary residence. Mortgage lenders charge higher rates for properties where the owner won’t be residing, so you should expect to pay a higher rate than you did for your home.
You should also be prepared to put down at least a 20% down payment on your investment property, which is almost always a minimum requirement by lenders.
Types of Financing Available for Real Estate Investments
Although the rates will be higher, there are still a variety of options available for funding your real estate ventures. Let’s take a look at the most common funding options, so you can decide which one is best for your investment.
Best for investors who have good credit and money saved for a large down payment.
A traditional bank that conforms to the guidelines set forth by Fannie Mae or Freddie Mac will fund investment property loans. Most lenders will require a minimum of 20% for the down payment, but other conventional lenders may require as much as 30%.
As a general rule, if you’re able to put down more than 20%, you’ll often lock in a better mortgage rate.
Best for investors who plan on living in a unit of their investment property.
The only way to secure a government-financed loan (like FHA) for an investment property is if you purchase a multi-family property, which will also become your primary residence. The best example of this is purchasing a split-level home where you live on one side and rent out the other.
In this case, you can often finance the property with a minimal down payment (around 3.5%), but as always, the more money you put down initially, the more you’ll save and the lower your rate will be.
Best for investors who will be purchasing multiple investment properties at once.
If you already have an existing real estate portfolio, you may be eligible for a portfolio loan that offers more flexibility and easier access to funding. This option can be used when you purchase multiple investment properties at one time.
There are different types of portfolio loans (such as blanket loans), but all generally have lower credit requirements, allow investors to purchase properties in poor or good condition, and offer quick approval timelines. Typical lenders for these loans include credit unions or savings and loan institutions, but some banks also offer portfolio lending options.
Best for investors who own their own company.
Commercial loans borrow money against the income value of the property, rather than your individual income. These loans are rarely made to individuals and are instead made out to companies, developers, funds, and partnerships.
It can be easier for companies to get approvals on commercial loans than conventional loans and the requirements are much more flexible. Loan terms tend to range from 5 to 20 years, but loan rates are generally higher than other investment loans. Commercial loans often have additional fees that investors need to consider.
Hard Money Loans
Best for investors who have bad credit or need funding fast.
A hard money loan is typically used for short-term real estate ventures, such as flipping homes. Private investors fund these loans, which are typically held against the value of the property rather than the investor’s credit history. Since these loans fund short-term investment projects, the loan terms typically do not exceed 12 months.
Hard money loans can be used to quickly fund investment properties, but borrowers should expect these loan rates to be much higher than conventional methods.
When searching for funding for investment property loans, there’s no one-size-fits-all solution. To find the lowest mortgage rate and best loan product for your investment, reach out to a qualified real estate agent with investment experience.
Clever can connect you to a talented local agent who can assist you throughout the purchasing process and help you make the best decisions for your investment property.