There is a difference between buying a home for a primary residence and buying one to gain rental income. Mortgage rates for investment property are generally higher than mortgage rates on traditional home purchases.
Moreover, the requirements to obtain an investment property loan are usually stricter. Despite the higher mortgage rates, it cannot be denied that investing in properties is a good idea. So, how much higher are mortgage rates for investment property?
Understanding Mortgage Rates on Investment Property
Mortgages rates on investment property ranges from 50 to 87.5 basis points higher than primary home mortgage rates.
For example, if mortgage rates for a 30-year, the fixed-rate mortgage on a home that the owner occupies is averagely around 3.25 percent.
You can expect a 30-year investment property loan to have an interest rate as much as 3.75 percent to 4.125 percent. It is because lenders have more risks when they lend money to real estate investors.
Higher risks mean higher interest rates as well as more stringent borrowing requirements. Property investors usually rent out their investment properties to gain rental income.
Periods of vacancy can increase the possibility of mortgage default if the investor is not financially prepared. After all, they would want to cover the mortgage payment on their residential home first. When times get hard, owners of investment property can cut their loss and run.
How Much Higher are Mortgage Rates for Investment Property?
As it is said before, investment property mortgage rates will always be higher than rates on primary residences. But how much higher is it? Different from the cheapest car insurance that has an exact number, how much higher the investment property mortgage rate is depending on some factors.
For example, your down payment, creditworthiness, and the type of investment property you choose. But as a practical rule, you may expect the interest rate on your investment property to be 0.50 percent to 0.75 percent higher than the rate on your main mortgage.
Lenders may also add an upcharge because they consider investment and rental property mortgages are riskier. As it is said before, borrowers would prefer to cover their primary home mortgage first than their investment property mortgage.
So, in order to protect themselves from the risk, mortgage lenders tend to charge a higher interest rate and apply stricter requirements.
That is the answer to the question how much higher are mortgage rates for investment property.