In the event that you have to get a mortgage for your first real estate investment property, take your time to look at the different choices available. Of course, it helps to have great credit. The better your credit is, the better chance you have of getting the loan that you want. Here are some choices when it comes to getting a mortgage loan for your property:
A fixed rate mortgage usually lasts for 30 years and doesn’t change, hence the term “fixed rate”. This is the mother of mortgage loans. For a long time, real estate investors were only able to get this kind of loan. When they get this fixed mortgage loan, it comes with a fixed rate that remains throughout the duration of the 30 years or less if they pay it off quicker. Upon the end of the e30-year term, the loan will be considered paid in full. In the beginning years, the monthly loan payments are applied toward the interest of the loan. As the years pass, they are eventually applied to the principal balance. This is about the easiest loan for investors to deal with because the terms are simple.
You usually won’t find anything unexpected down the road as you continue to pay it off. Real estate investors would probably want to look at paying off the loan early so they won’t be saddled down with a lot of debt for a long time. The focus of real estate investing is to create wealth, not to always have financial liabilities. When investors get wealth from real estate investing, they can enjoy it as they continue to invest in more properties.
No-Money Down Loans (Zero Investment)
This is another type of mortgage loan that can be used by real estate investors. They won’t have a problem trying to get information about this kind of loan, because they are always advertised somewhere. It can sometimes be touted as one of the best loans since sliced bread. However, it’s important that investors know the risks about securing this kind of loan.
Real estate investors can get this kind of loan by securing a mortgage that is 100%, or they can get what is called a “piggyback” mortgage. A piggyback mortgage is when the investor secures two mortgages at the same time and put them together.
With a piggyback mortgage, the investor gets a perk by not needing a downpayment at the closing process. Also, the investor can benefit from getting the largest amount of interest available to include in their taxes as a deduction.
Being an investor, it is not always guaranteed that you will get the entire amount financed for the loan. There are many banks and other lenders that will not provide the entire 100%. If some do decide to provide the entire thing, then they will get their share by including higher interest rates. This way, they can cover themselves because you would not have provided a down payment.
As with anything else that is zero-down, your mortgage payments will be higher than usual. If you don’t have a lot of money as a financial backup, this kind of loan could hurt you in the long run. It would take you longer to have a comfortable cash flow because you would be paying a larger amount in mortgage payments. So, you may want to think about this loan option a little harder than you would others.
However, a zero-down loan could still work out for you in terms of securing an investment property. It’s up to you as to whether or not you’re willing and able to take the risk.
Adjustable Rate Mortgage
Adjustable rate mortgage loans, or ARMs, as they are commonly known as, are almost as popular as fixed rate mortgages. Real estate investors are known for using these as well. If you decide on this loan, you can be assured of having a variable interest rate.
A variable interest rate is the rate that lenders charge and it often fluctuates. The rates change in accordance with the increase or decrease of interest rates in the market during that time.
It would start off with a fixed rate for a few years. Then it would go into a variable period. This means that after the fixed rate period is over, your loan rate (and monthly payment) is subject to adjusting every year.
With that, the majority of ARMs have a stopping point of how much they can change. With this loan, the rate can increase or decrease to a certain amount as long as you have it.
In the beginning, this kind of loan may include a low rate of interest. For some real estate investors, this would work for them because they may not want to hold on to the property for an extended time.
Also, when the interest rates decrease, investors can grab at the chance to get in on them. On the other hand, this loan is very risky. When interest rates increase, the investor will have to go with the flow.
The bad thing about this is, they will not know in advance when the rates will increase. In reality, ARMs can be an unsure thing because you don’t know how much money you will continue to pay due to the constant fluctuations.
Another loan that is good for real estate investors in the interest-only mortgage loan. Investors can use this loan when they are having a hard time with getting positive cash flow. This usually happens when the value of the property. has increased.
Some investors normally get interest-only loans if they don’t want negative cash flow, if they want to use the cash for something else, or if they’re thinking about getting into property flipping for a future date.
When an investor has this kind of mortgage loan, they can hold off on principal payments for a certain period of time. It is usually no more than ten years, but could be less than that. The investor is only paying the interest and nothing else during this period.
In order to get rid of the principal in the future, the loan is amortized again after the period of only paying the interest has ended. The investor ends up paying a higher mortgage loan payment. There are several ways that the investor can handle this situation: sell their property, stick with the higher payment or try to refinance.
Having a balloon mortgage is not one of the popular kinds of mortgage loans, but real estate investors have used them. This mortgage increases using a longer time than the actual mortgage term. The investor ends up with a smaller payment.
However, at the term’s end, there will be a balance that the investor has to pay in full or refinance the loan. If the investor can’t pay the lump sum in full or get refinancing, they will end up selling the property.
Even though there is an advantage for smaller mortgage payments in the beginning, at the end, the investor can come out as the loser if they can’t pay off the entire balance or refinance. Plus, with refinancing, the investor will have to deal with an interest rate increase, plus refinancing costs. That’s just more money coming out of their pocket than necessary.