Why Are Investment Property Loan Rates Higher Than Other Mortgages?

By: , Contributor

Published on: Sep 04, 2019 | Updated on: Nov 30, 2019

Investment property loan rates are higher than other mortgages because of the increased risk they present to the lender.

t’s a struggle real estate investors have always dealt with, and for many it’s just another cost of doing business.

But what’s actually behind the expense? Why do savvy real estate investors need to pay more than the average Joe buying a house on Main Street?

The main gist is that investment loans are riskier to lenders. Here’s a little more detail on why:

1. Your income relies on the property

One of the biggest problems is that your income is directly correlated to the property you’re purchasing, and its future profitability can’t be easily predicted or guaranteed. If that investment goes south and you’re not able to reap the returns you were hoping for, you might not have the financial means to keep paying your loan. This presents an added risk for the lender. Charging more in interest helps protect against this risk and cushion the blow should things go awry.

2. You don’t plan to live there

When you live in a property you’ve mortgaged, you’re less likely to up and abandon ship when the going gets tough. In most situations, you’d probably do all you could to make those mortgage payments and avoid losing your house.

With an investment property, you don’t have as much of a personal stake. Sure, you want to make money off the home, but your physical safety and security (or that of your family) doesn’t depend on it. This makes you more likely to bail on the home -- and its attached mortgage -- when finances are tight (or even if it’s just not producing the income you set out for).

Because of this, lenders are usually more cautious when financing a property you’re not planning to live in, and that shakes out to a higher interest rate and stricter qualifying requirements.

A little pro tip here: If you want to finance a duplex or triplex and actually live on the property, you might be able to get some sweet deals on your loan. FHA loans are available for these types of purchases and only require a 3.5% down payment.

3. Your job isn’t predictable or stable

Homebuyers with non-traditional jobs are typically forced to use a Non-Qualified Mortgage (Non-QM) or bank statement loan due to the unpredictability of their employment and overall income. These loans come with higher rates than traditional financing options and can cost significantly more over time.

The same idea applies to real estate investors. If you’re a full-time investor or a good chunk of your income relies on your rental properties, there’s no guarantee you’ll have the same or similar income a year from now. As a result, your lender will slap a higher rate on the loan to help protect themselves.

4. Your assets are tied up

Cash reserves and liquid assets are vital if you want to secure a decent rate on an investment property loan. If all your cash is tied up in hard-to-move real estate, it means you have fewer options if money gets tight. Again, this presents an additional risk to the lender and forces the higher rate.

Want a lower rate on your investment loan?

Obviously you want to minimize your investment loan’s interest rate as much as possible. To help move the needle, consider putting down a hefty down payment and have at least a year’s worth of estimated mortgage payments in the bank before applying. Improving your credit score can also help your case in the rate department.

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