Are mortgage rates for investment loans typically higher?

13 Replies

Getting ready to buy my first investment property, so I thought I'd be proactive and get pre-approved for a certain amount before I find a house to bid on. I contacted the big bank I have my primary loan with to see what they're requirements were. They told me for an investment property they require 25% down and the interest rate is typically .5% higher than for a primary residence loan.

Is this typical? Can you find 20% down mortgages at normal rates for investment properties? This would be a jumbo loan if that matters.

Yes they are usually between .5% to 1.5% higher on a conventional loan. Everyone's borrowing situation is different. For many 25% down will be about a half point higher and 20% will be a full point higher than the average. However your credit and dti and such will play a big roll in the loan terms.

Unless it's a multi unit and you living in one of them, then it'll have the primary residence rates. Otherwise yeah, it's not as favorable...

Yes they are higher..  Bankers will tell you that the reason they are higher is because banks are taking more risk by lending to an investor vs lending to a homeowner who plans to live in the property, as an investor is more likely to walk away from the property while a homeowner will take more efforts not to do so.  Maybe there is an element of truth to that point of view. But the way I see it is that banks charge investors more because they CAN. They know investors got more money than average Joe who might be struggling to get his 3.5%.  It is what it is. 

For Conventional financing, investment property rates are only about 0.25% - 0.375% higher, and you can put as little as 15% down.

For Jumbo financing, it's a different world. Usually 25% down, and yes investment property rates can be anywhere from 0.25% - 1.5% higher depending on the bank/lender. Unlike Conventional financing where Fannie and Freddie set clear guidelines that everyone follows (although many lender's have overlays), in the Jumbo space each lender has their own guidelines, so it's not as uniform.

The reason the rates are higher for investment properties, or lower credit scores, multi-units, lower down payments, etc, are because of the higher risk of default associated with each of these.

Hope that helps!

What's interesting to me is the banker I talked to said secondary / vacation homes are NOT subject to the same, higher rates. Seems like there's some gray area there!

My primary residence has a nice loan. In five years or so I plan to move on and rent my current place out. Is the bank going to cause a stink because I have the original loan still?

@Daniel Smith You can turn your primary residence into a rental with no consequences. Just make sure you adjust your homeowners insurance accordingly.

@Chinmay J. The higher rate has nothing to do with the fact that they can charge higher rates...it is purely a function of risk mitigation. Investor loans default at a higher rate and have a higher loss severity than owner occupant loans. As we've seen in the jumbo loan market over the last several years (This would be loans made to people with more money) those rates have dived below Fannie Mae rates as their default and loss severity rates decreased, so the risk premium dropped with them accordingly. Banks are merely a pass through of all this money by and large. They make money primarily on servicing the loan and the interest rate means by and large nothing to them. It is the demands of the market that set the rates, and as the risks associated with a given type if loan change so will the interest rate associated with such a loan.

Originally posted by @Daniel Smith :

@Russell Brazil Why are the loss rates higher on investment properties do you think? Doesn't walking away from an investment property destroy one's credit just like jingle-mailing your primary residence?

 Probably because people have more of an issue with being homeless than they do with losing their primary residence. Thats purely conjecture though. One of them has to be higher, it just happens to be that investment property losses are the higher of the 2. Student loans have the highest rate of default and thus have high interest rates correspondingly.  If it wasnt for the ability to fully attach those loans to a person permanently, they would be incredibly more higher.

Default rates and loss severity are not the only thing that go into risk premium analysis in interest rate setting, but they are probably the 2 biggest factors.

@Russell Brazil nailed it. I was shocked and rather annoyed to learn that I had to take on .5- 1% more. 
All the ads: "Only 3.5% APR!" -- Bogus.
Mine was far higher. 

A few thoughts:

  • I was using a smaller bank (want to support the locals) so that could have been less competitive.
  • All those internet quotes are for people with incredible debt-equity ratios and 760+ credit scores. It's interesting there are all these laws against false advertising, but it's still a partial bluff.
  • Multifamilies / commercial have higher interest rates so one can't compare it to your buddy's screaming hot deal for his home.
  • You could pay points to lessen the interest (1 point = 1% of the loan), but the break even I was hearing for my situation was a 5 - 7 year time horizon. 
Originally posted by @Chinmay J. :

 Maybe there is an element of truth to that point of view. But the way I see it is that banks charge investors more because they CAN. They know investors got more money than average Joe who might be struggling to get his 3.5%.  It is what it is. 

 That's patently untrue. Here is a link to FNMA's loan level pricing adjustments

The lender would be losing money by offering owner occupant interest rate pricing to investors.

Those are adjustments to the price of any given interest rate, not to the rate itself. So if you want to put 15% down on a single family investment property, that's 4.125% in discount points that can either be covered by bumping your rate, or you're welcome to pay 4.125% in discount points to get the same rate as an owner occupant. It varies by day; typically 0.3% to 0.8% in discount points translates into 0.125% to rate.

On request, I can and do share our LLPAs with borrowers, so they can see that we're simply passing on FNMA's LLPAs at-cost and not turning it into a profit center (there are a few end-lenders that do in fact turn this into a profit center; I simply don't offer them to REI borrowers... maybe my little one man boycott will do something, but I doubt it).

It should also be clear from reading that why lenders want you to put 25% down even when it is not technically required in many cases -- our reputations will quickly be trashed if we run around offering 15% down non-owner-occupant to every random Joe that calls us, because Joe's friends and colleagues are just going to say "what's your rate and who gave it to you?" and random Joe cannot be trusted to include the "oh and btw I only put 15% down, which no one but this one lender even offered" in their answer.

@Daniel Smith they are higher because the lender is taking a bigger risk.  there is a much higher percentage of second homes going into foreclosures then primary residence.

But just like repair costs, vacancies, etc......use the numbers your lenders are giving you for cost of money and see if the deal works with them in mind.

if you need more help don't hesitate to PM me....