It’s just an inescapable fact for loans on investment properties: the interest rates tend to be higher. This is simply because an investment property, for obvious reasons, has a higher chance of foreclosure than a primary residence.
While the specific numbers are hard to find, conventional wisdom in the industry states that investment properties are roughly three times more likely to go through a foreclosure than a typical primary residence. Higher percentages of foreclosures will lead directly to higher interest rates, which will help lenders compensate for the risk.
Investment-Property Mortgage Rates: Where Do We Stand, Where are We Going?
Whatever the specific numbers, there are reasons for investment-property mortgages having higher rates of foreclosure, and hence higher interest rates. People inevitably tend, in a financial emergency, to stop making payments on their investment property while continuing to make payments on their primary home.
This really is a no-brainer. Think about it: if you had two mortgage payments, one for your family home and one for your investment property, which would you stop paying on, and risk losing, first? The home where your children live, where your family gathers, and where you’ve built your life? Or the investment property that brings an extra thousand dollars (give or take) every month? Any reasonable person would not hesitate; they’ll protect the roof over their family’s head, even if it means losing the investment property. People simply fight harder to keep their home, which has an emotional attachment not found with investments.
For this reason, you will find that investment property mortgage rates are slightly higher than the rates for a mortgage on a family residence.
Because of the higher risk, interest rates on investment-property mortgages tends to be 1% to 1.5% higher than traditional loans on a single-family home.
While there are many variables behind mortgage rates, if you compare interest rates on primary residences to interest on investment properties you will see a clear trend. NerdWallet, for example, provides data on interest rates from numerous banks:
Primary Home (Single Family)
- WaterMark: 4.25%
- Better Mortgages: 4.25%
- Chase: 4.75%
- NBKC: 4.5%
- ConsumerDirect: 4.5%
- J.G. Wentworth: 4.625%
Investment Property (Single Family)
- WaterMark: 5.25%
- Better Mortgages: 5.375%
- Chase: 6.25%
- NBKC: 5.875%
- ConsumerDirect: 5.625%
- J.G. Wentworth: 5.875%
Numbers provided above are for example only and do not reflect interest rates on loans from San Diego Purchase Loans.
As you can tell from the numbers provided above, interest rates on investment-property loans tend to be 1 to 1.5% higher than the interest on a typical primary-home mortgage. This aligns with industry trends, and while the numbers provided above are not official (and will change over time), they do support the assumption of higher interest rates on investment property loans.
Where are We Going with Investment-Property Mortgage Rates?
We know that investment property loans usually have higher interest rates, but what can we expect in the future? Investment properties tend to rise in a parallel fashion with interest rates across the board, so as interest rates on a conventional loan for a primary home rise, so too will the interest rates on an investment-property loan. And according to virtually all predictions, interest rates will continue to rise.
Over the past few years, we have seen a steady increase in the national economy, and this rise in market activity and strength has led to a rise in interest rates, driven largely by increases from the Federal Reserve.
For more on how the Federal Reserve increase impacts mortgage rates, read this article on Fed increases.
As the economy strengthens (there are fits and starts, but the overall trend has been upward), you can reasonably expect interest rates to continue increasing. In 2018, the Fed increased rates four times, with the most recent coming in December.
A growing economy is good for virtually everyone. There are more jobs, more investment opportunities, and more chances to make a profit in almost all sectors of the economy. There is one downfall for real estate investors, however. Unfortunately, as the economy grows and interest rates increase, the potential for profit on investment properties purchased with loans decreases. Simply put, if you are paying more in interest, you’ll have a higher monthly payment; if you have a higher monthly payment, your profit margin on the property is reduced. You’ll either have to accept the lower profit or charge more in rent to make up the difference; neither is an appealing option.
How to Reduce the Interest Rate on Your Investment-Property Mortgage
Interest rates are not set in stone, and it’s always possible to have a lower rate on your mortgage if you make the right steps. Here are a few basic tips to help reduce the interest you pay, which will mean lower payments and a better chance at profitability.
- Use a Larger Down Payment: The larger a down payment you bring, the better chance you have at scoring a low down payment. Large down payments might be difficult, and could limit future investment options, but they will increase your chances of a lower interest rate.
- Improve Your Credit Profile: If you have a strong credit history, you should be able to get a lower interest rate. With a history of timely payments, a manageable debt load, and conservative approach to new credit, you may be rewarded with a higher score, which means lower interest and a lower payment.
- Reduce Your DTI: The debt-to-income ratio is an important number for lenders, so if you have a lot of debt, you may be able to reduce your score by eliminating some of your financial obligations.
- Purchase a Multiunit Home and Live in a Unit: If you want to start your portfolio of investment properties, a popular first step is to purchase a two- to four-unit property and occupy one of the units. This allows you to file the home as a primary residence, but you will be required to live in the unit for an extended period.
Get Expert Advice on Your Investment Loan
If you want to learn more about interest rates on investment-property mortgages, contact the helpful staff at San Diego Purchase Loans. We’ll help you choose the right loan with a reasonable interest rate for your next investment property!