Investment Property Mortgage Rates in 2023 + Tips for Homebuyers

Aalto Insights Team
Sep 26, 2023

Investing in real estate is considered one of the best ways to build wealth and secure your financial future. In fact, real estate is roughly 40% of a typical millionaire’s net worth!

Between property value inflation, appreciation, steady cash flow, and numerous tax write-offs, real estate investments have numerous benefits. While this investment avenue is definitely worth considering, you shouldn’t jump into things unprepared. Here’s what you should know about investment property mortgage rates and what they look like in 2023.

The Basics of Investment Property Mortgage Rates

Investment property mortgage rates: stressed couple using a laptop

Investment property mortgage rates (also known as interest rates) play a vital role when it comes to financing your investment. They help determine how much you’ll pay in interest over the duration of your mortgage loan and can substantially impact your cash flow and return on investment. 

Several factors influence investment property mortgage rates:

  • Credit score: Your credit score helps determine the interest rate you'll receive. A higher credit score usually results in lower interest rates, while a lower score may lead to higher rates.
  • Loan type: The type of mortgage you choose—fixed-rate or adjustable-rate—can affect your interest rate. Fixed-rate mortgages offer stability with a consistent interest rate, while adjustable-rate mortgages may start lower but can increase over time.
  • Loan-to-value (LTV) ratio: Your LTV ratio compares the loan amount to the property's appraised value. The higher your LTV ratio, the riskier your loan, which can lead to higher interest rates.
  • Market conditions: The state of the overall economy, inflation rates, and the Federal Reserve's policies can influence mortgage interest rates. A strong economy often leads to higher rates, while a struggling economy can result in lower rates.
  • Location: Mortgage rates can also vary by region. Some areas may have slightly higher or lower rates based on local market conditions and demand for real estate.

Here are a few other terms you should know:

  • Annual Percentage Rate (APR): APR represents the true cost of borrowing money, accounting for your interest rate and associated fees and charges. Using APR as a key metric, you can compare different mortgage lenders’ offerings and determine which is best for you.
  • Monthly payments: Your monthly mortgage payment is the combination of your principal and interest payments. If you have a fixed-rate loan, your monthly payment will remain the same throughout the duration of your loan. This does not include homeowners insurance, mortgage insurance, or property taxes.
  • Mortgage points: Points are fees you can pay directly to your lender for securing an investment property loan or mortgage. You can secure a lower interest rate by prepaying for a portion of the interest upfront. In other words, points allow borrowers to buy down their interest rates, which ultimately saves you money overall.
  • Upfront costs: Upfront costs are the fees you pay once your offer has been accepted. They include items like your down payment requirement, earnest money deposit, loan origination fees, property taxes, home appraisal fees, and other closing costs.

Current Investment Property Mortgage Rates

Investment property mortgage rates: entrepreneur working at an office

Here are today’s 15-year and 30-year average investment property loan rates, according to Forbes:

15-year and 30-year average investment property loan rates

Why Are Investment Property Mortgage Rates Higher Than Owner-Occupied Homes?

Lenders for investment property rates tend to charge a higher interest rate for these loans because they are considered riskier investments. Typically, these rates are at least 0.5-0.75% greater than a primary mortgage.

This is because homeowners tend to prioritize their primary residence over their rental properties, which makes sense. If you faced financial hardship and could only pay the mortgage on one of your homes, which would you choose: your primary residence or investment property?

There are also a few other risks associated with investment properties, like government regulations, market volatility, and the potential challenges you may face as a landlord looking for someone to pay rental income.

How to Get the Best Investment Property Mortgage Rates

Here are a few strategies you should use to get the best rates:

  • Improve your credit score: Build your credit profile by paying your credit cards and other bills on time, reducing any outstanding debts, and monitoring your credit report for inaccuracies. A higher credit score can get you lower loan options. Aim for a minimum credit score of the 700s or higher, or a 760+ for the best rates.
  • Increase your down payment: While making a minimum down payment can help you keep some cash reserves, a larger down payment can lower your LTV ratio, potentially securing a lower interest rate. Consider saving more before you buy.
  • Compare rates: Shop around and compare rates and terms from multiple lenders to find the most competitive option. Don’t just settle for your first option!
  • Weigh loan types: Determine whether a fixed-rate or adjustable-rate mortgage aligns with your investment strategy. Fixed-rate mortgages provide predictability, while adjustable-rate options may offer lower initial rates.
  • Watch for market trends: Stay informed about economic conditions and Federal Reserve policies. If you can apply for your mortgage when rates are low, you can save a lot of money throughout the life of your loan.

Types of Investment Property Mortgage Loans

Investment property mortgage rates: couple talking to a financial adviser

There’s no shortage of loan terms and types for investment properties. Here are the main ones to consider:

  • Conventional mortgages: Conventional loans are what most homebuyers are used to. These are loans you receive from private lenders, like banks, credit unions, and mortgage companies, and adhere to the guidelines created by Fannie Mae and Freddie Mac.
  • Federal Housing Administration (FHA) loans: Usually, FHA loans are meant for your primary residence and not your second home. However, you can purchase and even refinance investment properties with an FHA loan. These loans come with limitations, especially if you want to invest in something larger than a single-family home.
  • Home equity line of credit (HELOC): HELOCs are typically used to repair or renovate your primary residence. However, you can also use them in other financial situations, like getting an investment property.
  • Home equity loans: Home equity loans are exactly how they sound — they let you borrow against your home’s equity by using it as collateral. Home equity loans and HELOCs offer long-term financing in case you intend to hold onto your investment property for a little while.
  • Hard money loans: If you’re more interested in buying an investment property to fix and flip it, a hard money loan may be right for you. Hard money loans are secured, short-term loans (often 3-12 months) that accept physical assets, like your current home, as collateral instead of making your financial history their main deciding factor. Because of this, these loans sidestep the rigorous conventional loan approval process and can get you cash in hand in just a few days. However, this type of loan’s interest rates tend to be higher (averaging around 11.25%). If you default, you risk losing your collateral.

Are You Ready to Become an Investment Property Owner?

If so, Aalto is here to help! For your investment property, you might be interested in taking more control over the process and cutting out the middleman. Aalto assists you with buying a house without a traditional real estate agent.

We offer exclusive homes you won’t see on any other apps, including off-market, recently unlisted, and coming soon homes. Plus, you can get a 1.5% commission rebate if you find a home you end up buying. (That’s $27k on average in the Bay area!)

Whether you’re a first-time homebuyer or a seasoned pro looking to become a landlord, our self-service real estate platform and team of experts can help you every step of the way! Sign up on Aalto today to start looking for your next investment property.

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