Investment in real estate is one of the best decision any initial investor can take. In fact, Investment property loans are the best option for investors to manage their lifestyle, budget and repayment. However, it takes a lot of effort to invest in the correct real estate property. There are certain purposes and reasons for investing in property for an investor. And therefore, every investment property will not be right for investment.
If you are planning for investment property loans, take suitable advice and guidance from a financial advisor or real estate broker. They know the best time and suitable location for property investment.
Here is the list of different loan types that can be availed for an investment property. It is best to identify which loan is suitable and beneficial for you and make correct decisions after analysing every parameter.
1. Conventional bank loans
Conventional finance requires 20% of the home purchase price as a down payment to the lender. But an investment property loan demands 30% of the down payment. To consider this loan, your credit score and credit history should be well maintained. It determines the interest rate and ability to repay the loan amount. Your income and assets are also reviewed by the lender to confirm later repayments.
You need to present your income factor and sources to show the lender that you can easily afford the mortgage and monthly loan payments. It is quite essential to choose an appropriate loan option for a great return on investment in real estate.
2. Hard money loan
It is a short-term loan on investment property and is suitable for flipping. You can use hard money loans to purchase a new property, and then you can pay it off with conventional loan facilities, primate loans or home equity loans. However, in case you don’t want to flip your property, these are the best options. The best thing about hard money loans is that you can get them more easily compared to conventional loans. Still, your credit, income, property’s profitability and ability to repay will be considered.
It is easy to measure your loan repayment ability through an estimated after-repair value (ARV). Possibly, you will get the loan amount within a few days, and don’t have to wait for a conventional mortgage closing.
Hard money loans can be quite expensive for a middle-class family. It is not cheap, but the interest loans can be higher at 18%, which is quite high at the original cost. Moreover, the payback time for such loans is also short. Origination fees and closing costs of hard money loans are also higher.
3. Private money loans for investment property
Private money loans can be arranged by any person willing to provide you with money and has faith or trust in you that you can repay them after some time. Sources of such loans are usually your friends, family, relatives and colleagues. If you don’ have close or real contacts for private loan money, you can join a real estate investment networking event. It is suitable to get a loan from some real estate contacts.
Small lenders are also available for private money loans, and their interest rate varies accordingly. Sometimes, the interest rate varies depending on the relationship and bond shared between you and the lender. The small lender tends to secure loans through legal contracts that provide authority to the lender to foreclose on the property for any default from your side. You should understand all the types of loans and their nature by reading or going through the terms and conditions of their loan policy.
4. Home equity loans
Home equity is also the best way to get a secure investment property loan. You can get a home equity loan, home equity line of credit (HELOC), and cash-out refinance. There is a possibility to borrow up to 80% of the home equity value. You can use it for the rehabilitation, purchase and repair of an investment property. Refinance housing loan is also available to pay off your pre-existing loan amount and reduce the interest rate on further loan amounts.
Using equity has some advantages and disadvantages as well. It all depends on the loan type because HELOC loans allow you to borrow loan amounts against equity similar to a credit card. The rate usually varies, and it may have the risk of increasing with the primary rate change.
A cash-out refinance is fixed but extends the life of your mortgage loan. A long-term loan indicates that you will pay more interest on your primary residence.
You can prefer the best home loan type as a first homeowner’s loan to manage all the budget and further expenses. Hire a lawyer or finance professional to handle your loan and budget simultaneously with a planned strategy.