Top mortgage types for property investors

When done right, real estate investment will bring solid returns. All you need is a smart plan and the right financing. Thorough research will give you a clearer picture. 

To make things simpler for you, here are the top mortgage options to consider for financing your investment:

  1. Investment property loans

Mortgage lenders typically consider investment property as high risk, and because of that, they offer mortgages for investors that are different from conventional loans. These are known as investment property loans.

Offered by national banks, private mortgage providers, and investor-only lenders, investment property loans require a larger down payment, involve higher interest rates, and usually include stringent requirements.

Borrowers of these property investment mortgages must have an excellent credit rating, for example. The lenders will ask to see your tax returns, pay stubs, and other documentation to prove your current income. Mortgage lenders also will assess the potential rental income to be generated by the property if you’re intending to serve as a landlord.

2. Conventional bank loans

These are typical bank loans that adhere to Fannie Mae and Freddie Mac guidelines. With these loans, mortgage lenders expect a down payment of 20% of the home’s purchase price; if it’s an investment property, though, lenders require a 30% down payment.

Typically, your credit score and personal credit history will determine your loan approval and the interest rate a bank can offer you for a mortgage. Lenders might also ask for your asset details as well as proof of income.

These loans are either fixed-rate or adjustable-rate (meaning the interest rate can change over time with market conditions) and are typically lower in payment size than FHA or VA loans. Terms of conventional loans range from 10 to 30 years.

3. Hard money loans

If you’re in a hurry to get a mortgage, or you’re into the fix-and-flip real estate business, hard money loans might be an ideal choice. Also known as bridge loans, these loans are provided by private companies and some real estate crowdfunding platforms.

With this type of financing, you’ll get the loan approved very quickly. Your credit rating doesn’t matter. The property itself is the security for the loan, and the lender provides greater flexibility in the matter because of that.

However, there are several disadvantages with hard money loans:

  1. Higher interest rates
  2. A far shorter repayment period (typically just one to three years)
  3. Higher origination fees and closing costs compared to other types of property investment mortgages. 
  4. Home Equity Line of Credit (HELOC)

Already a homeowner? Great! You can finance your second home for investment through HELOC.

Think of HELOC like a credit card: You can withdraw money up to a certain limit anytime you want. Typically, you pay only the interest every month, with repayments starting in seven to ten years

With a HELOC, you can borrow up to 80% of your home’s equity value. Interest rates are generally linked to the prime rate and as such, are subject to market fluctuations. If you prefer cash-out finance instead, it comes with a fixed rate.

The downside of a HELOC is if you default on the loan, your home will be at risk.

Never rush through financing

Investing in real estate is a high prospect venture, but you must tread carefully. There are many pitfalls, and real estate financing is one of them.

Rushing through the investment without securing the right mortgage may prove disastrous. Instead, research various property investment mortgages thoroughly in order to choose the right one. Only then can you achieve the returns you’re seeking from a new real estate investment.

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