Interest Rates for Investment Properties: What to Expect

The Investment Property Rate Premium

Investment property loans carry higher interest rates than primary residence loans. Lenders charge this premium because investment properties have higher default rates. During the 2008 financial crisis, investors were far more likely to walk away from rental properties than from homes they lived in. The historical data drives lender pricing to this day.

The typical premium by loan type looks like this. Conventional investment property loans run 0.50% to 0.875% above primary residence rates. If the going rate for an owner-occupied 30-year fixed mortgage is 6.5%, expect 7.0% to 7.375% for an investment property with the same borrower profile. DSCR loans add another 1.0% to 2.0% on top of conventional investment rates. Hard money and bridge loans operate in an entirely different range, typically 9% to 15%.

On a $250,000 loan, every 0.25% in rate equals approximately $42 per month or $504 per year. Over a 10-year hold, that quarter-point difference costs $5,040 in additional interest. These numbers make rate shopping one of the highest-return activities in the entire acquisition process.

Factors That Determine Your Rate

Credit score. This is the single largest factor within your control. Rate pricing tiers typically break at 680, 700, 720, and 740. Moving from a 680 score to a 740 score can save 0.50% to 0.75% on your rate. Before applying for a loan, check your credit reports for errors, pay down revolving balances to below 30% utilization, and avoid opening new credit accounts.

Loan-to-value ratio. Lower LTV means lower risk for the lender, which translates to a lower rate. A 75% LTV loan (25% down) will price 0.125% to 0.375% better than an 80% LTV loan (20% down). If you have the capital, the extra 5% down payment can pay for itself through rate savings over the hold period.

Property type and unit count. Single-family properties get the best rates. Two to four-unit properties carry a small premium (0.125% to 0.25%). Condos and non-warrantable condos may carry additional adjustments. Properties with 5 or more units fall into commercial lending with entirely different rate structures.

Loan type and term. 30-year fixed rates are higher than 15-year fixed or adjustable-rate mortgages. A 7/1 ARM (fixed for 7 years, then adjustable) may be 0.50% to 0.75% below a 30-year fixed rate. If your planned hold period is under 7 years, the ARM rate savings are real and the rate risk is minimal.

Number of financed properties. Under Fannie Mae guidelines, borrowers with 5 to 10 financed properties face pricing adjustments of approximately 0.25% to 0.50% compared to borrowers with fewer properties.

Strategies for Getting the Lowest Rate

Shop aggressively. Get quotes from at least 3 to 5 lenders including a mortgage broker, a direct lender, a credit union, and a bank. The spread between the highest and lowest quote on an investment property loan is often 0.50% to 1.0%. Mortgage brokers can be especially valuable because they have access to wholesale rates from multiple lenders.

Lock your rate strategically. Rate locks typically last 30 to 60 days. If rates are trending down, a shorter lock period or a float-down option may get you a better rate. If rates are volatile or rising, lock early and pay for a longer lock period if needed.

Buy down the rate. Paying discount points (each point equals 1% of the loan amount and reduces the rate by approximately 0.25%) makes sense for long-term holds. On a $200,000 loan, one point costs $2,000 and saves about $42 per month. The breakeven is roughly 48 months. If you plan to hold for 10 years, the point saves you approximately $3,000 over the life of your hold.

Improve your profile before applying. Boost your credit score, reduce your DTI, and increase your reserves in the months before applying. A 2 to 3-month preparation period focused on optimizing your borrower profile can save thousands over the loan's life.

Fixed vs. Adjustable: Making the Choice

For long-term buy-and-hold properties (10+ year hold), a 30-year fixed rate provides certainty and protects against rising rates. Your payment is the same in year 1 as in year 30, while rents (and income) increase over time. This built-in margin improvement is one of the most powerful wealth-building mechanics in real estate.

For shorter holds (3 to 7 years), adjustable-rate mortgages offer lower initial rates. A 5/1 or 7/1 ARM can save 0.50% to 0.75% during the initial fixed period. If you sell or refinance before the adjustment period begins, you capture the savings without taking on rate risk.

Avoid adjustable rates on properties you may hold indefinitely. The savings are not worth the uncertainty if there is any chance you will hold through the adjustment period. Rate increases of 2% to 5% over the initial rate are possible and can severely damage cash flow.

For general tips on getting approved for investment property financing, see Tips for Getting Approved for an Investment Property Mortgage.