Purchasing investment properties can be a lucrative venture, especially when interest rates are low and there are many properties available on the market. In times such as these, property investors are at a great advantage. When investors find a property in which they are interested, they need to determine what type of financing is available to them. Due to the fluctuations in market conditions over the last few years, there have been changes in the types of loans available to property investors. Even with this change, there are still several ways in which individuals may finance investment properties. Regardless of one's investment goals, there are various loans available to help investors maximize the return on their investment.
Types of Investment Property Loans
The most common types of loans used to purchase investment properties include: fixed rate mortgages, adjustable rate mortgages (ARMs), option arm loans, and subordinate financing. Because different situations require different types of financing, property investors can determine which type of financing will be best suited to meet their individual circumstances. Several factors that need to be considered when selecting a financing option are: the length of time the investor plans to own the property, current interest rates, and the investor's exit strategy. Based on these factors, investors will choose the type of financing with which they are most comfortable and confident.
Fixed Rate Mortgages
Fixed rate mortgages are a type of traditional mortgage and are usually written for 15 to 30 year terms. With a fixed rate mortgage, the interest rate will remain the same for the entire life of the loan. The monthly payment due with a fixed rate mortgage will not increase or decrease based on a fluctuating interest rate.
Adjustable Rate Mortgages (ARMs)
There are several elements to ARMs that help determine interest rates and overall payments. These elements include: index, margin, rate adjustment period, interest rate cap, and negative amortization cap. All of these elements work in conjunction with one another to cause a borrower's interest rates to either increase or decrease periodically throughout the life of the loan. Essentially, the interest rate of the loan is directly affected by the cost of the money at the time the loan is written as well as fluctuations in the index rate.
Option Arm Loans
Option arm loans may be used in certain circumstances, but they will not work for every property investment scenario. Option arm loans allow investors to maximize their cash flow while taking advantage of the equity available in properties that are appreciating. With an option arm loan, investors can make a minimum payment that results in deferred interest or negative amortization. By deferring interest, investors can maintain their cash and invest elsewhere.
Subordinate Financing
Subordinate financing includes things such as second mortgages and home equity line of credit (HELOC). This type of financing may be beneficial to property investors as it allows them to reserve financial resources and assets for things such as down payments and closing costs. Subordinate financing is typically used when property investors desire to finance more than 80 percent of the property's appraised value.
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