Financing Your Real Estate Investment Properties
There are a few ways that you can Finance an investment. We will touch on them all in this article. First you have to determine what you are going to do with the property (hold, flip, rehab, section 8 rental) If you deal with the right lender they should ask you that as soon as they find out that you are an investor.
If you plan on holding the property for a rental you should determine the length of time you are planning to do this. Example you do not want a 1 year Adjustable rate mortgage if you plan on holding for the 30 years. If you only plan on holding for a year this might suit you just fine. You want a plan of attack before you talk to a Mortgage Professional. You want a term that gives you the best rate, fees, and payment for the time you will have the loan.
If flipping or rehabbing is what you have in mind again you do not want a 30 year mortgage on the property. It would be best suited for you to go with the shorter term Adjustable rate mortgage. This could save you as much as 3% and on a $100,000 loan that would save you about $190 a month or about 2300 for that year. Then there is a hard money loan. These carry a higher interest rate (can be from 3-7% higher), but they will base the loan off of the After Repared Value (or ARV for short) where the mortgage will only cover about 95% of the purchase price or appraised price (will now be reffered to as LTV=Loan To Value).
Now with Section 8 rentals. HUD has loan programs for investors who do this. They are generally low interest loans that will include the money for repairs. They will also find you the renters and pay you the rent or atleast a majority of it.
Now lets get into the mortgage programs.
Prime- Mortgages for borrowers with over a 620 fico score. Lower interest rates with higher LTV's and lower costs.
Sub-Prime- Mortgages for borrowers with a 619 and under fico score. These carry higher rates and higher costs.
ARM- these come in many lengths ( 3mo, 6mo, 1yr, 3yr, 5 yr, 7yr, and 10 yr). These can be dangerous if you are staying for a long time. They will adjust every 3mo to 10 yr depending on the term of the ARM. They do have a capon how high they can go though. Generally this is anywhere from 1% to 5% depending on if it is a Prime or Sub-Prime arm. Ideal for people looking to be in the home for a short period of time.
Hard Money- Can be great for investors that are flipping or rehabbing. They base it off of ARV not LTV. So you could get the money need for repairs. The avg ARV is 65% but I have seen them up to 80%. These carry higher rates and are generally from 1-2 year terms then the loan is due. They base the payments on a full 30 year term. If you shop the programs of the hard money lenders you should be able to find the one that suits you.
Interest only- is where you only pay the interest on the loan and not the principle. This could save the investor some money over the time. But on a normal 30 year loan you pay mostly interest in the beginning and interest only loans are again based on the 30 year term. So if you Finance a $10000 home in the normal 30 year program you will pay $665.30 in just inerest and principle and broken down for 1 year you will pay $6967.81 in interest and only $1015.79 towards principle. So for an interest only loan at the same 7% ( this will hardly ever happen to get the same rate) you divide the $6967.81 by 12 to get $580.65 Payment. The $100000 due at the end of the term.
So see there are many different ways to go. The best advice I could give as a Mortgage Banker is find a honest and a willing to work for you mortgage professional.
Carl Feathers Jr.
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