Investment properties are a good way to increase your networth, however, unless you have cash sitting around, you're going to have to take out a mortgage to purchase the investment property. The type of mortgage you will have to take out are called investment property mortgages. These mortgages are usually more difficult to acquire because from the banks perspective, they are more risky because the owner of the investment property could just stop paying on the mortgage because they don't have the incentive to maintain a roof over their own head.
In the past, investment property loans normally would require the investor to put down at least 20% to purchase the property. In the recent past however, due to the overwhelming availability of credit, some investment property mortgages required no down payment and allowed individuals to purchase property with no cash out of their pockets. Due to the current credit crisis that the nation is experiencing, investment property mortgages have started going back to the normal 20% down requirements if not more. You also would require excellent credit.
The whole $0 down payment for even owner occupied housing now a days require down payment and usually closing costs to be paid to get the mortgage. This is all because in a normal environment, the purchaser of property should have their own skin in the purchase of their own houses. In the past, those with minimal investment in the property would be quick to stop paying on the investment property mortgages if they fell into economic difficulty. To help protect the banks position, they require real estate investors to put down 20% to help reduce the risk and make the investor more likely to keep paying on the investor mortgage. They are after all, hopefully collecting rental income which should then apply to the mortgage and allow the investor to make money and the bank to receive their monthly payments. Of course, economic situations can change for the worse and make it difficult for the investor to continue to make those payments. If you had to decided on making the mortgage payment for your own house versus making the payment on your investment, which decision would you make. That is why investment property mortgages are riskier for makes to make.
Needless to say, because of the need for down payments on the part of the investors, there is no available no closing cost mortgages available for those of us who want to purchase investment properties. Needless to say, this does not bode well for those of us who are cash poor but credit rich to be able to acquire investments. This is probably for the best because there are many individuals out there who are out to make the quick buck, but are also quick to walk away if the investment does not pan out. These are rational thought processes in my opinion, however, they do not bode well for the different parties involved.
This presents a problem for those of us who seek investment properties. Well, another tactic you can take is to get a Home Equity Loan, HEL, or a Home Equity Line of Credit, HELOC, to come up with your down payment to purchase the property that you are looking at purchasing. This assumes that you will be able to pay your monthly payments and the payments do not present a burden on your daily living expenses. Currently, you can acquire a no closing cost second mortgage from various institutions, not everyone can or will qualify for these loans however because of the tightened restrictions.
If you currently own your own house and are still sitting on a pile of equity in your house though, you could potentially refinance your house and pull some equity out to make that down payment on that investment property. You could also just do a no closing cost refinance mortgage, get your cash out of the house, and then apply the cash to the purchase of one or more investment properties which fit your investment profile.
There are mortgages out there that are well suited for you, but there are also mortgages out there that would not be well suited for your needs. If you are looking for increased cash flow, refinancing your mortgage to a lower rate and extending the loan term works, but you could potentially pay more in interest over the life of the loan. One thing brokers do to make a no closing cost mortgage is roll all of the costs into the loan. For instance, if you were going to refinance a $100,000 mortgage, and closing costs were $2,000, the new loan amount with the closing costs rolled into the loan would be $102,000. The negative aspect to that is that now you could potentially be paying interest on the closing costs for up to 30 years. So that $2,000 actually ends up turning into $6,000 or there about because you’ve paid interest on it for 30 years. In the end, that figure is a rip off, but that is my opinion.
The best thing to do for investment property mortgages is to save your money or pull it out the equity in your own house through a low interest rate HEL or HELOC. I would lean towards a HEL because that is a fixed interest rate for a fixed period of time versus the HELOC interest rate is subject to move based on the underlying interest rate the HELOC is based off of, usually prime rate. At this time, the prime rate is at an all time low and who knows how long it will stay there. One thing that I am fairly certain of is that the rate has a better likely hood of going up because it cannot go down much further.
Investment property mortgages also carry a higher rate of interest to compensate the lender for the higher risk as well. For instance, the rate difference can be as high as 1%-2% higher than an owner occupied home mortgage to include the higher closing costs. Investment property loans are usually defined as property that is four units or less. If you go over the four unit threshold, that moves you up to the commercial property loans which are a whole another beast that this blog is not going to discuss. Needless to say, these loans are like business loans and you have many more hoops and costs to go through to acquire a commercial loan. Doesn’t mean it cannot be done, it’s just that much more difficult.
Another restriction is imposed by Fannie Mae and Freddie Mac. They are government sponsored agencies and because they purchase a majority of the mortgage loans made to individuals out there, they can dictate which loans they will purchase and indirectly, dictate mortgages that individuals can take out. Per Fannie Mae and Freddie Mac guidelines, they will only allow four outstanding mortgages to be taken out by an individual at any one time. The only way to get around this restriction as far as I know is to either pay off the mortgages so that you can get another property. If you don’t have the cash available, one way of doing that is getting the HEL second mortgage like I mentioned earlier and transfer the debt onto your own personal residence. You may also be able to potentially get an investment property HEL on the investment property and get around the four property restriction.
Regardless of the many restrictions out there, there are options to get around restrictions and different ways of doing things. Like they say, there is many ways to skin a cat, and this would be one of those situations in which the saying applies. Regardless, if your looking for an investment property mortgages, the best place would be to try locally with banks in the area you live in, then try elsewhere. In the current credit environment however, investment property mortgages are difficult to come by, but they are not impossible.
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