Mortgage Rates and Real Estate Investing

Sep 1, 2022

Mortgage Rates and Real Estate Investing

Whether you’re involved in real estate strictly for investment purposes or shopping for a new home, you may be reading news about rising interest rates and wondering how it could affect you. The good news is, there’s no need to panic. 

Interest rates fluctuate all the time, and an increase in the cost of a mortgage over the life of the loan can sometimes even be a good thing for investors. But we’ll get into that later. Here’s what you need to know about loan types, what’s going on with the Fed, and how you can see whether you’re getting the best rate.

Compare current mortgage rates 

Today’s mortgage rates are rising, surging to an average rate of 6.28% for 30-year home loans after hitting record lows during the pandemic. If you’re applying for a loan, the mortgage interest rates you’re offered and the total loan amount available to you may be influenced by:

  • the area you’re applying in
  • the mortgage lender you choose
  • your credit score
  • whether you’re able to count potential steady rent as income 

The rates in the table below are average rates for fixed-rate mortgages and average APR—or annual percentage rate—which takes into account interest and other kinds of fees you may have to pay for the loan, such as origination fees.

Type of MortgageInterest RateAPR30-year fixed-rate5.32%5.4%30-year fixed-rate FHA loan4.44%5.25%30-year fixed-rate VA Loan4.63%4.9%20-year fixed-rate4.92%5.05%15-year fixed-rate4.45%4.60%10-year fixed-rate4.44%4.64%7-year ARM5.10%4.57%5-year ARM4.73%4.26%3-year ARM3.24%4.50%
Data sourced from Zillow on June 24, 2022

Be sure to look closely at the terms of the rates you’re exploring. Some sample rates may include discount points, which are fees you can pay to lower the interest rate of your mortgage.

For example, say you want to buy a $300,000 house with a 20% down payment of $60,000, and you’re offered a 30-year mortgage with a fixed interest rate of 5%. At that rate, your monthly payment will be $1,724, which spreads out the total cost of interest over the life of the loan into equal monthly payments. 

You can use a mortgage calculator to figure out precisely what you’ll owe monthly for the specific property you’re considering. 

What factors affect mortgage rates? 

The overall range and base level of mortgage rates are primarily affected by decisions from the Federal Reserve. When the economy is strong, rates are generally higher. When the U.S. economy is weak, or when there are global fears — such as war, pandemics, trade issues affecting international commerce, and so on — you may see lower interest rates as the Fed makes it cheaper to borrow money to spur growth. 

But the rate you can get for a mortgage loan within that range is also influenced by other factors. Here’s what’s affecting the bottom line of the rates offered to you:

  • The Fed, economy, here and abroad: The Federal Reserve sets interest rates in response to economic forces outside your control. Interest rates go down when the economy struggles to encourage people to borrow and spend more money. When the economy is relatively booming, interest rates go up to curb the flow of cheap cash and avoid contributing to inflation.
  • Your credit report: If you have strong credit, you’ll likely be offered interest rates at the lower end of the range you’ll see during preapproval checks, as you’re a lower-risk borrower. A great credit score will help you secure the best mortgage rates possible. 
  • Your down payment: Lenders will weigh the size of your down payment against the total amount of your loan. Generally, if your down payment is less than 20% of the total amount you’re financing, you’ll be liable to pay a premium for mortgage insurance—which protects the bank if you cannot pay. Remember that mortgage insurance can substantially increase your monthly mortgage payment and may include upfront costs. You’ll generally have to pay it until you’ve paid down enough of the principal balance mortgage to equate to a 20% down payment.
  • The amount of money you borrow: If you want to take out a mortgage for more than $647,000, that will be classified as a “jumbo loan.” Jumbo loans are what they sound like—large loans that are more than what’s considered a conventional conforming loan for the county in which you’re applying. Traditionally jumbo loans have been significantly more expensive than conventional mortgages, but in recent years interest rates have started to even out. Some lenders offer lower interest rates for these larger loans, so shop around and see what’s available.
  • The type of loan you take out: There are different rates available for various lengths of the loan term, fixed and variable-rate loans, private lender loans, and FHA loans or loans managed by the Department of Veteran’s Affairs. Government-backed loans such as those from the FHA and VA generally have lower interest rates.
  • How you want to use the property: You may receive better interest rates (and a better deal on property taxes, too) for property loans for a home you’re planning to live in compared to a second home, vacation rental, or strictly investment property.

Ultimately, you won’t know precisely what kind of fixed- or adjustable-rate mortgage you’ll be able to get until you apply for one. And while economists can only guess about how interest rates may change over the long term, many lenders will offer you a mortgage rate lock to freeze an offer you’ve applied for today for a period of time while you shop for the right property. This can be an excellent way to hedge your bets against a volatile market if you’re not quite ready to buy.  

Read on for some FAQs about mortgage rates. 

What is a good mortgage rate? 

Mortgage rates change daily and have steadily increased multiple percentage points this year, but they’re still historically low. According to data from Freddie Mac, the government-sponsored enterprise that buys mortgages from lenders and pays dividends to the Treasury, the average interest rate for a 30-year fixed loan in May 2022 was 5.23%. 

By comparison, rates were well into the double digits through much of the late 70s and 80s. 

The best way to know if you’re getting a reasonable rate on a mortgage is to shop around from different lenders. Many tools exist on sites like Nerdwallet and Bankrate to help you compare rates, fees, and benefits from other lenders. 

It’s also good to remember that while you can’t predict whether rates will go up or down—or by how much—over the next few years, you may be able to refinance for a lower interest rate later. Refinance rates may sometimes be higher—especially cash-out refinancing rates, where you’re borrowing against a property’s equity to fund a new purchase. 

How do mortgage rates affect real estate investing? 

While increasing mortgage rates might sound like a bad thing—and can certainly create stress for borrowers—they’re generally the result of a strong economy. When the economy improves, interest rates go up as a measure to temper inflation. When it’s more expensive to borrow money, fewer people do it. That means there’s less cash in circulation, and, in theory, prices won’t rise as quickly. When more people are flush with cash, prices typically rise in response. 

This can affect investors in several ways. While it will be more expensive to get a loan, that also means the cost of rent goes up as fewer people can get into the housing market as first-time homebuyers, which means investors may see better short-term gains from rental income. 

These factors can also impact the supply of available property on the market so that it may hold steady even as supply decreases. While there’s less incentive to flip houses as the property may not appreciate nearly as quickly, it enables investors to find good deals for the property they plan to hold medium- to long-term.

Mortgage rates and buyers/sellers 

Rising mortgage rates can tip the scales from a seller’s market to a buyer’s one over time. While single-family home prices have skyrocketed at record rates over the last two years, those homeowners are now generally less likely to want to sell their homes because new financing will be more expensive. 

At the same time, buyers will be looking for less expensive homes as the added interest cost will eat into their budgets. Thanks to low supply, however, prices generally hold steady rather than fall under these conditions. So, while there may be less inventory for sale, buyers—both individual homeowners and investors creating portfolios—may not have to deal with as much competition, so prices may stabilize rather than continue to rise at the rates they’ve recently been growing.

Mortgage rates and rental markets 

Mortgage rates affect the affordability of the housing market and how easy it is for new buyers to break in, which in turn impacts rent prices. When fewer people can afford to buy, more people need to rent, putting pressure on the market and driving up prices to the benefit of landlords and investors. The higher the interest rate is, the higher your monthly payment will be—and the more you’ll spend over the life of the loan. You can use a mortgage calculator to determine how interest rates impact your monthly payment amount. 

Mortgage rates and property value

Traditionally, higher mortgage rates correspond with inflation, corresponding to increased property values. While even the best economists can’t predict what’s going to happen next, higher mortgage rates have generally corresponded with property appreciation over time, according to the Urban Institute, which analyzed decades of data from Freddie Mac.

Easily invest in rental homes 

You don’t have to own a rental home to profit from the real estate market. You can easily invest in rental homes and benefit from appreciation without comparing mortgage rates and lenders, saving for a down payment, or dealing with the hassle and expense of closing costs. 

Arrived’s team of real estate experts has hand-selected valuable properties you can profit from with an investment of virtually any size. Browse current offerings today and see how much your investment could grow over time.

The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice.  View Arrived’s disclaimers

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Ryan Frazier, Arrived CEO, and Cameron Wu, VP of Investments, will be hosting webinars to talk about how to get started with rental property investing. Sessions are held on Tuesdays at 9am PST and Fridays at 1pm PST each week (unless otherwise posted).

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