Investment property vs primary residence interest rate

Buying a home to generate rental income is a different process from buying a primary residence. Investment property mortgage rates are generally higher than rates on traditional home purchases, and the requirements to get an investment property loan are typically more stringent.

• Understanding investment property mortgage rates
• Comparing owner-occupied and investment property loan rates
• How to get a lower investment property mortgage rate
• FAQs about investment property mortgages

Understanding investment property mortgage rates

Investment property mortgage rates can range from 50 to 87.5 basis points higher than rates on a primary home. As an example, if mortgage rates for a 30-year, fixed-rate mortgage on an owner-occupied home are averaging about 3.25%, you might expect a 30-year investment property loan to have a 3.75% to 4.125% interest rate.

Why? Because lenders are exposed to more risk when lending money to real estate investors. Higher risk means higher interest rates and stricter borrowing requirements.

Investors typically rent out their investment properties to collect rental income. Periods of vacancy can increase the likelihood of mortgage default if an investor isn’t financially prepared — after all, they’d want to cover the mortgage payments on their main home first. When times get tough, investment property owners can cut their losses and run.

Comparing owner-occupied and investment property loan rates

Investment property lenders want to make sure that prospective borrowers are creditworthy and capable of keeping up with the financial demands that owning an investment property requires.

If you’re considering an investment property, it’s important to know the lending process won’t mirror what you experienced when buying your main home, and it’ll likely cost you more.

Let’s compare how investment property interest rates stack up against rates on a primary residence. Using LendingTree’s home loan calculator, we crunched the numbers for a 30-year, fixed-rate loan on a $250,000 home with 20% down ($50,000). (Note: Interest rates are current as of this writing.)

As the table illustrates, the higher rate for an investment property loan translates to a monthly mortgage payment that’s about $56 more than a loan for a primary residence. Additionally, the total amount of interest paid over the life of the loan is more than $20,000 higher.

How to get a lower investment property mortgage rate

• Have a good credit score. You’ll need a minimum 640 credit score to qualify for an investment property mortgage — but a lower score won’t get you the most competitive interest rate or reduce your minimum down payment requirement. Aim for a score of 700 or higher.
• Make a larger down payment. Contributing more than the minimum down payment means you’ll borrow less money and reduce your lender’s risk. Consider putting down more than 20%.
• Reduce your existing debt. Your debt-to-income (DTI) ratio compares your monthly debt payments to your monthly gross income and shouldn’t exceed 43%, in most cases. You’ll need plenty of room in your budget to cover the mortgage payment for an investment property, though 75% your projected rental income may be factored into the equation. Don’t forget the other expenses of a rental property, too — these include maintenance, repairs, homeowners insurance, property taxes and fees to screen tenants.
• Boost your cash reserves. Cash reserves are liquid assets you have on hand after you’ve covered your down payment and closing costs. Typically, lenders look for at least six months’ worth of mortgage payments in cash reserves for investment properties, but it wouldn’t hurt to have a year’s worth or more. Since an investment property can be risky, the extra cash cushion shows you’ll have money to make payments when your property is between renters.

FAQs about investment property mortgages

Are mortgage rates higher for investment property loans? 

Yes, investment property mortgages typically have higher interest rates than loans for primary homes. Rates on investment property loans can range from 50 to 87.5 basis points higher than mortgage rates on loans for owner-occupied properties.

What’s the minimum down payment for an investment property mortgage?

The minimum amount for an investment property down payment is usually 15% for a conventional loan, but there are a few caveats: Your credit score must be at least 700 to be eligible to put down 15%. If your DTI ratio is 36% or lower, however, you’d only need a 680 score.

Can I use gift funds for my rental property down payment?

Down payment gifts aren’t allowed on investment properties. One possible workaround for this rule is to buy a multiunit property, where one unit is your primary residence.

Can I have two primary residences? 

No, you can’t simultaneously own two primary residences. Your primary residence is the home in which you live the majority of the time. You can only have one primary residence at a time, according to the IRS.

Can I use the equity in my home to buy an investment property?

Yes. Provided you qualify, you could tap your equity through a cash-out refinance, home equity loan or home equity line of credit (HELOC), and use those funds to cover the down payment on an investment property mortgage.

A cash-out refinance allows you to take out a new mortgage for more than your current loan and withdraw the difference in cash. A home equity loan is a lump-sum payment that’s repaid in fixed monthly installments — similar to a traditional mortgage — while a HELOC is a revolving credit line that works much like a credit card. Your main home is used as collateral for all three of these options, and you could lose it to foreclosure if you fail to repay any of these loans.

How many investment properties can I own? 

You can technically own as many investment properties as your finances allow. However, you can only finance up to 10 investment properties through conventional mortgage lending. 

Which types of loans can be used to purchase an investment property?

You can use a conventional loan to buy an investment property. If you plan to live in one unit of a multiunit investment property, you can take out a loan backed by the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA).

What can I do with an investment property?

There are several uses for a residential investment property, including:

• House flipping, which can be done after making home improvements that increase the property’s value
• House hacking a multiunit home, which allows you to live in one unit and rent out the other unit(s) to cover your mortgage payments and create a passive income stream
• Providing short-term rentals through a platform like Airbnb
• Providing long-term rentals in six- to 12-month increments