Are Loan Rates Higher For Investment Property Purchases?

Last Updated 1/12/2015

Both mortgage loan rates and investing in property are both very attractive right now, but should real estate investors expect to pay higher than advertised interest rates when applying for a loan?

The true profitability of any investment property really all comes down to the financial leverage. What may at first look like an unbelievably great and profitable deal, could be far less attractive, and even result in negative cash flow if interest rates and borrowing costs end up being far higher than expected.

Experienced real estate and finance professionals understand that the lowest advertised loan rates generally apply to the least risky loans and borrowers. Investment property loans are often seen as being riskier than owner-occupied and vacation home loans. Mortgage lenders anticipate that in a cash crunch most borrowers will first choose to default on their investment property loans first, and their residences last.

The riskier a loan is perceived the higher the interest rate. Loan officers and mortgage brokers, and their clients will almost invariably discover ‘bumps’ for pricing out investment property loans. However, this doesn’t mean that real estate investment loans have to come with high investment property mortgage rates or will be unattractive. The whole scenario comes into play. For many there may just be an eight or a quarter percentage point difference. It also depends on your individual scenario for example; an investor with great credit looking for a low LTV loan, might find they get a far better rate than a first time home buyer looking for 100% financing with bad credit.

There are many ways to offset any bumps to rates for investors too. This includes; property type, location, property quality, loan to value, adjustable versus fixed rate loans, loan amounts, pre-payment penalties, and paying points. So speak with a mortgage professional and discuss your options for obtaining the lowest possible investment property mortgage rates and optimum investment property loan terms.