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Mortgages and Real Estate Investing
By: Michael Press
Unless you have enough cash in your bank account to buy an investment property, you're gonna need some type of loan. Mortgages are not loans. A mortgage is piece of paper which you signed, promising to pay off your loan by a certain date. You give the bank a mortgage, and the bank in return gives you a loan, with your investment propety being collateral.
Mortgages are great for real estate investors because they create leverage. Leverage is using other peoples money in order to buy income producing assets. With long-term real estate investing, your tenants are actually paying off your rental property's mortgage, while providing you with a nice monthly income. But the terms of a mortgage for a rental property are different than those of an owner-occupied property.
If you own your own home, and you still have a mortgage for it, you have an owner-occupied mortgage. The rates and terms for owner-occupied mortgages are typically better than the terms for invesment property mortgages. If you have no experience landlording, mortgage brokers and banks may require you to take out an Adjustable Rate Mortgage(ARM). But, that doesn't really matter because if your mortgage's interest rate goes up, you can just raise the rent to cover the cost.
When shopping around for a mortgage for your investment property, there are two main items that you should shop around for. The first is the Loan to Value (LTV) ratio. Banks and mortgage brokers will require a down payment, usually 20%. The loan to value ratio is the relationship between the amount owed on the mortgage, and the sale price of the investment property. For example, if you bought an investment property for $100,000.00, and got a mortgage for $80,000.00, your LTV ratio would be 80%. The higher the LTV ratio, the more leverage you have.
The closing cost involved with obtaining a mortgage can be a big chunk of change. Most banks require a lender fee, and they call their lender fee's points. Point is just another word for percent. If a bank charges a 2 point lender fee for a $100,000.00 mortgage, then the lender fee is $2,000.00. There's also other costs invloved such as title insurance, settlement fees, and miscellaneous fees (also known as garbage fees).
Mortgages are great for real estate investors because they create leverage. Leverage is using other peoples money in order to buy income producing assets. With long-term real estate investing, your tenants are actually paying off your rental property's mortgage, while providing you with a nice monthly income. But the terms of a mortgage for a rental property are different than those of an owner-occupied property.
If you own your own home, and you still have a mortgage for it, you have an owner-occupied mortgage. The rates and terms for owner-occupied mortgages are typically better than the terms for invesment property mortgages. If you have no experience landlording, mortgage brokers and banks may require you to take out an Adjustable Rate Mortgage(ARM). But, that doesn't really matter because if your mortgage's interest rate goes up, you can just raise the rent to cover the cost.
When shopping around for a mortgage for your investment property, there are two main items that you should shop around for. The first is the Loan to Value (LTV) ratio. Banks and mortgage brokers will require a down payment, usually 20%. The loan to value ratio is the relationship between the amount owed on the mortgage, and the sale price of the investment property. For example, if you bought an investment property for $100,000.00, and got a mortgage for $80,000.00, your LTV ratio would be 80%. The higher the LTV ratio, the more leverage you have.
The closing cost involved with obtaining a mortgage can be a big chunk of change. Most banks require a lender fee, and they call their lender fee's points. Point is just another word for percent. If a bank charges a 2 point lender fee for a $100,000.00 mortgage, then the lender fee is $2,000.00. There's also other costs invloved such as title insurance, settlement fees, and miscellaneous fees (also known as garbage fees).