Differences Between Rental Property Loans And Traditional Financing For Investment Properties
What is a rental property loan? A rental property loan, sometimes called a first lien loan, is a first mortgage loan secured by a rented property instead of an owner occupier. To qualify, the real estate it is attached to must be rent ready. Generally, however, rental property loans are also used for short term rentals, including vacation rentals. The concept behind both types of loans is to provide homeowners the opportunity to buy property without paying all of the upfront costs associated with buying a home.
Both types of loans are simple and easy to obtain. The biggest issue is cash flow. Cash flow is the ability to payback the loan on the agreed period of time. If the property value does not increase as planned, borrowers will not earn the expected profits from the investment. Conversely, if the value of the property increases as planned, they will be able to payback the rental property loans on their principle balance.
Many borrowers face challenges when choosing between rental property loans and a traditional home mortgage. One of the factors most often considered is prepayment penalties. Although most borrowers understand the consequences of prepayment penalties, they often choose a higher interest rate in order to get the best deal. Whether this is the right decision depends upon the specific circumstances involved with each borrower.
Most conventional owner-occupied mortgages include penalties for prepayment. In fact, these penalties can significantly reduce the savings homeowners realize by choosing to finance investment properties using a rental property loans. These penalties are applied to the original loan and not to the return of the loaned funds. Therefore, any savings the investor receives on investment properties does not come from interest rates, fees or points. The penalties are applied to the principal of the loan, which means that if borrowers have to pay a penalty for prepayment, they will actually lose money on the investment.
It is important to understand that there are many different types of owner-occupied mortgages. When comparing rental property loans with a conventional loan for investment purposes, it is important to consider the differences between interest rates, principal amounts, and other factors. Choosing the right one is often determined by the specific needs of the borrower. Some people prefer to finance a vacation home in a lower cost of living city. Others prefer to finance investment properties in areas where home prices are expected to increase. Check out also the MoFin Loans.
When borrowers make the decision to finance investment property mortgages, they typically have one of two options. They can choose either to finance the property using a rental property loans or a conventional financing plan. If they opt to finance the property using a rental property loans, they are typically required to place a lien on the title of the property. This means that should the borrower default, the lender can take possession of the property. Alternatively, borrowers may elect to finance the purchase of the property using a conventional financing plan, but they do not place a lien on the title.
Read also this related article: https://www.huffpost.com/entry/5-basic-tips-for-investing-in-real-estate_b_9072532
