Six types of Mortgage Loans for Real Estate Investors
By: Mary D., Published: Apr 13, 2020 | Related: Mortgage Help from Government
If you are a real estate investor, you have the choice of several mortgage types. The one you choose will set your risk level and determine the amount of revenue that the property will produce. While many factors are involved with a return on investment (ROI), the loan type is one of the most important aspects.
The following six mortgage types are the most popular among investors.
While a fixed-rate mortgage is predictable and presents little risk, it does not always have the lowest rate of interest. If you intend to hold a rental property for a number of years, this type of loan will allow for a predictable ownership cost. You will not have the stress of rate changes that can diminish your bottom line. You also have the option of refinancing at a later time, so a fixed-rate mortgage is not without flexibility. Even if you do not like the current rate, a fixed-rate loan may still be the right solution if it does not interfere with your cash flow.
This mortgage type is attractive because it initially offers lower rates, but you will have to risk rate increases for the time you hold the investment. Adjustable-rate mortgages are more suitable for short-term investments where you can sell the property before rates increase. Alternatively, you can choose this mortgage type if you anticipate that interest rates will decrease. The loans typically cover five, seven and 10-year time spans and fit well into a short-term investment strategy without hurting cash flow prospects.
If you want lower monthly payments, an interest-only loan may be the solution. It works by allowing you to pay only on the interest for a specific amount of time. The drawback is your rates will most likely increase. This type of loan works well if you are doing house flips and expect to sell the property within a few months after purchase because it reduces your out-of-pocket expenses for that period of time. An example of this is a loan that covers the time period between purchase closing and resale closing. Another option for this loan type is using it for a 1031 exchange to reduce costs and keep up the cash flow.
A decade ago, investment experts praised the zero-down option as an excellent way to increase investment returns. While it will substantially increase return, it is considered to be quite risky. In addition, you will have a difficult time obtaining a zero-down mortgage in the current market as the loan type became almost non-existent after the 2007 downturn. There are more options appearing on the market since the economy recovered, but you will have to search hard to find a zero-down loan.
This type of mortgage works by amortizing the cost over a length of time that is longer than the actual loan period. You can see a great deal of savings in your monthly payments, but you will likely need to refinance when the term is over. An example of this is getting a loan to purchase a property and making payments that are based on amortization over 30 years, but the loan itself is for a five-year term. You will have to pay off the remainder of the loan after the five years has passed. This is a balloon payment. The main benefit of balloon financing is that it saves a large amount of interest.
When you are shopping for a loan, beware of offers that seem perfect. Anything that appears too good to be true often is and involves a great deal of risk. Most creative lending types disappeared after the downturn of 2007, but it is best practice to be on the lookout for scams. One exception to this is the blanket mortgage, which is a loan that covers several properties that are already owned by the person borrowing money. The properties can have equity that is useful for other investments. They can also be used as security for future purchases.
Before investing, consider your options and do research to get the best return on your money.