A turnkey investment property in cash isn’t for everyone. It’s perfectly acceptable! There are certainly advantages of purchasing a home using funds, there’s benefits to the use of a loan for instance, having leverage and not locking up all your money in one asset. When it comes to real estate property, the most popular kind of loan is a mortgage. This typically comes from a bank or credit union. But, it’s not the only loan option available when purchasing a property. There are numerous options that are available and understanding a little about each of them can help you when making the right decisions regarding financing your home.
Mortgage
A widely used loan to purchase rentals is the mortgage. It is offered by banks or credit unions. The loans are quite simple in the way they operate and how they work: you are approved to take out a loan of a specific amount according to your asset/debt ratio, as well as credit scores. You accept the terms of the loan (interest rate, the length of the note and more.) and you make an initial down payment. You begin paying the loan once you have closed at the closing of your home. This is it however, you should be aware that, under the umbrella of mortgages there are other loan subcategories. This includes:
- Fixed Rate: This kind of loan comes with an interest rate that is fixed and will not alter over the course of the loan, as long as you don’t refinance it or change anything else that could affect the terms of the loan.
- Flexible Rate – This loan has a flexibility of a rate of interest which can be adjusted upwards or downwards based on the market conditions.
- Zero Down – It works exactly as it sounds. You do not need to make an initial down payment. But, you’ll have a tough time finding this kind of loan after 2008 in the lending market. The financial crisis that hit the market almost completely wiped out any chance of lending companies taking on this kind of risk. It is much more likely that you get a loan that is able to make a smaller (but not completely zero) down payment. Just be prepared to pay higher interest rates.
- Balloon mortgages are short-term loans that typically end within five or seven years. The payment for the loan is the same as what you’d pay on the 30-year note, however after the five or seven years have expired the borrower is required to pay the remaining balance, which can be quite.
Home Equity Loan
Home equity loans provide another alternative for investors who already own their own house. In this type of credit, any equity you’ve built up in the property you currently own is used as collateral which is the amount you are able to get. The advantages of a home equity loan are reduced interest charges, an ease in getting the loan secured, and the capability to qualify for a substantial loan (enough to purchase an investment property or make an investment down payment) in the event that you have the equity up.
Seller Financing
The concept of seller financing is fairly straightforward. In this situation the homeowner is willing to finance the sale and the buyer then will pay the homeowner directly. This is a great alternative for investors who are not eligible for a mortgage, or would like to skip an extended closing. From the perspective of the seller it could be an excellent option to earn a little more money from the sale of their home because all profits will go to them instead of a bank or another lender.
Hard Money Loan
The hard money loan is the best option for those who want to avoid the traditional lending institution for some reason. It could be that they’d have a difficult time obtaining or they want to move quickly and aren’t willing to wait for long approval or closing procedures. These loans are also able to offer greater flexibility since they originate from a private lending institution that isn’t governed by the rules that banks must comply with. Thus, the loans are able to be tailored to meet specific needs which is beneficial to both the borrower as well as the lender. The majority of loans made with hard money will cost more, however they’re typically only available for short periods (i.e. less than five years). If you don’t have enough cash to purchase an Investment Property do not fret about it. There are plenty of loans that are available even if you have the perfect credit score or thousands of dollars in savings. Explore your options, find out all possible about every and then determine which is the best fit for you!
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