Are Mortgage Rates Higher for Investment Properties?

June 8, 2011 1 Comment »


Mortgage Q&A: “Are mortgage rates higher for investment properties?”

So you’ve decided to purchase an investment property to make a little extra cash on the side.

Perhaps you think now is the time to lock in a low mortgage rate and snag a foreclosed property at a discount.

Well, before you make your move, know that mortgages rates are significantly higher for investment properties.

On top of that, qualifying for a mortgage on a rental property is a lot more difficult as well.

So not only will you end with a higher mortgage rate, but you’ll also have to bring more money to the table for your down payment, as loan-to-value ratios are typically much more restricted.

Gone are the days of 100% financing on investment properties folks – and who knows if they’ll ever return.

How much higher are mortgage rates on investment properties?

It’s difficult to say your rate will be “X percent higher” because there are so many different combinations and a large number of issuing banks, but you could pay a percentage point or two higher.

For example, 7% vs. 5%, which is certainly significant, especially if we’re talking about an expensive rental property, such as a 4-unit property.

And if it’s a refinance (or cash-out refinance) expect mortgage rates to be even higher, assuming mortgage financing is even a possibility to begin with.

If your investment property is 3-4 units, as opposed to 1-2, expect another pricing adjustment.

If it’s also a condo, watch your rate climb even higher.

* You may get a discount if you go with a 15-year fixed vs. a 30-year fixed.

Why are rates higher on investment properties?

Well, banks and mortgage lenders see investors as riskier borrowers than homeowners.

After all, if you live in your home, there’s less of a chance you’ll walk away if things go south. There’s probably a better chance you’d ditch your investments before your primary residence.

And if you occupy it, there’s a better chance you’ll maintain it properly and keep it in good shape. Pride of ownership and all that.

Most investors are also homeowners, so if they had to choose, they’d probably pay their own home’s mortgage first…and not displace their entire family.

This explains why many investors pay with cash or commit occupancy fraud to obtain lower mortgage rates. In other words, telling the lender you plan to occupy the investment property as your primary residence and then quickly renting it out after obtaining financing.

Read more: Are mortgage rates higher for condos?

One Comment

  1. Julia Taylor October 19, 2016 at 7:51 am -

    Dear Colin,
    I’d really like your advice if you could spare a couple of minutes…
    My husband and I are currently in Washington, DC with a three-quarters paid mortgage on our 2 bdrm apartment in Foggy Bottom. He works in cyber security for CFTD (vaguely government…)
    We’re looking to purchase a retirement condo on a golf course in Knoxville, TN at approx. $ 230,000, and have up to $100,000 to put down leaving $130,000 (or more) to finance. The plan is to rent the property for the next four years until retirement then move there ourselves.
    The best rate for a 15-year fixed that my husband has come up with is about 3.6%! Surely we can do better than that in today’s market, or am I just being overly optimistic?
    Your advice and comments would truly be appreciated and possibly avoid divorce!!! :-)
    My sincere thanks in advance,
    Best regards,
    Julia Taylor

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