For much of the 2010s and early 2020s, real estate investors enjoyed historically low interest rates. Borrowing costs were often below 4%, creating a tailwind for asset appreciation, cash flow, and refinancing flexibility. But as of mid-2025, we’re in a fundamentally different lending environment.
The average 30-year fixed mortgage rate has hovered around 6.8% since early May 2025, according to the Freddie Mac Primary Mortgage Market Survey (PMMS). And based on current economic indicators, there is no compelling evidence that rates will return to pre-2022 levels.
As an investor, this isn’t cause for alarm – it’s a call for adjustment.
The New Reality: Rates Have Reset, Not Temporarily Spiked
Freddie Mac’s September 4, 2025, report shows the average U.S. 30-year fixed mortgage rate at 6.5%, far above the 2.78% average recorded in July 2021.
The Federal Reserve has maintained its target rate between 4.25% and 4.5%, and while inflation has moderated, Fed officials have repeatedly signaled they are in no rush to cut rates substantially.
How to Underwrite Deals at 7% With Confidence
Smart investors are not sitting on the sidelines waiting for a rate reversal. Instead, they are recalibrating their underwriting to reflect today’s cost of capital.
1. Stress-Test at Higher Rates
Don’t base your buy box on the current rate alone. Underwrite your deal at +50 to +100 basis points above the quoted rate (e.g., model at 7.0%–7.5% even if your rate is 6.5%).
This helps protect against:
- Delays in closing or rate lock expirations
- Market-driven lender repricing
- Refinancing under less favorable terms
This kind of rate sensitivity modeling is especially critical if you’re considering bridge-to-perm financing strategies or value-add repositioning.
2. Account for Rising Insurance and Tax Burdens
Insurance costs have surged across many markets due to climate risks, supply chain challenges, and reinsurance pricing shifts.
Similarly, property tax reassessments are becoming more common in appreciating markets, particularly in states with shorter reassessment cycles. Build in an annual 8%-12% increase in taxes and insurance unless capped by local regulations.
3. Reevaluate Exit Assumptions
If your hold strategy includes refinancing, don’t assume a rate much lower than your entry rate. Instead, underwrite for:
- Flat or slightly higher cap rates
- Interest rates in the 6.5%–7.5% range
- Lower-than-historical LTVs (65%–70%) to account for tighter lending standards
If rates fall, your DSCR and equity positions will benefit, but don’t build your business model on that assumption.
Adapting vs. Waiting
It’s natural for investors to feel cautious in a higher-rate environment. But the historical data is clear: returns in real estate often accrue to those who act when others hesitate.
By adopting more conservative, rate-proof underwriting practices, you can identify deals that actually work in today’s environment, not just hypothetically in a more favorable one.
