In order to understand what the difference between investment property
mortgage and home mortgage is, we first need to understand what a mortgage is in general. Mortgage is a type of loan that a mortgage lender or a bank gives you. This is in order to provide you with financial help for the purchase of your real estate property. However, different mortgage rules apply regarding the different property types. Are you eager to learn more about the topic? Continue reading in order to understand how investment property mortgage differs from home mortgage. Before jumping into answering the question, it is important to review to two types of mortgage separately.
Related: Paying Off Investment Property Mortgage Early: Pros, Cons, Tips
#1 What Is Investment Property Mortgage?
Investment property is not the person’s primarily residence. Rather, it is a real estate property that holds the primary idea of generating profit. Therefore, the real estate investor will be making money in real estate. The purpose of investing in real estate might be for various reasons. For instance, financing real estate investments to buy them might be for the sole purpose of selling them back soon for a quick profit. Another potential reason might be the idea of having rental properties as part of your real estate investment portfolio, and thus, receiving monthly rental income.
Regardless of the investment reasons, many real estate investors take a mortgage loan. But why is that so? It is usually seen that the majority of real estate investors simply do not have enough money for financing real estate investments, such as rental properties. Due to this, it is considered that buying real estate is much easier with a mortgage loan, especially if you have recently started investing in real estate.
So, how is it all done? First of all, the real estate investor needs to find a bank or other investment property mortgage lenders. In this way he/she can take mortgage and invest in real estate properties. It is advisable to find local banks or investment property mortgage lenders rather than banks working on the national level. There are several reasons for this. First of all, local banks/lender are more likely to invest. Second, local bank and investment property mortgage lenders are more likely to charge a lower down payment. Down payment is the money which the real estate investor gives to the seller and usually it is expressed as a percentage of the total sum. For instance, if you buy a house for $100,000, and the down payment is 10%, this means that you pay the seller $10,000, and the rest $90,000 comes from your mortgage. It is most beneficial to borrow approximately 80% of the value of the property or even lower: the lower, the better, when we are talking about investment property mortgage.
Related: Buying an Investment Property: Cash or Mortgage?
#2 Rental Property Mortgage Rates
You also need to know that the rental property mortgage rates fluctuate depending on the purchase of a specific property, your credit history, and also your down payment. For instance, the rates are higher when purchasing an investment property compared to a home for your personal use. Another thing which you need to know is that rental property mortgage rates change all the time. In order to be up-to-date with the rates fluctuation, it is better to contact investment property mortgage lenders for some in-depth information on investment property mortgage. There are many factors that influence the buyer’s decision when taking a mortgage. That is why the real estate investor should not only pay attention to the rental property mortgage rates but also to which investment property mortgage lenders have better conditions with regards to time frames, down payments, etc.
Related: All You Need to Know About Mortgage for Rental Property
#3 What Is Home Mortgage?
As it is possible to understand from the question, home mortgage is about receiving a mortgage loan for your future house, apartment, or simply put, the place, which you are actually going to call your “home”. Additionally, home mortgage can also refer to owner occupied mortgage. Home is the primarily place where you live for a minimum of one year. A property which consists of one to four units with the owner living in one of them is an owner occupied property.
So, the home mortgage is when you receive a certain amount of money, depending on the end property price, for purchasing your own home. Moreover, the bank or the mortgage lenders usually charge the future home owner with an interest. That interest is in addition to the end house price. In most cases, the reason people apply for home mortgages is that they are not able to handle financing real estate properties purchases on their own. The downside of home mortgage is that if someone delays or skips the payment, he/she may simply lose the home.
#4 How Do Investment Property Mortgage and Home Mortgage Differ?
There are numerous differences between investment property mortgage and home mortgage. If you want to buy an apartment for personal use, you are obliged to keep a set of requirements. However, if you purchase an apartment for generating profit, you will be obliged to complete another set of requirements. So, what is the difference between investment property mortgage and home mortgage?
- Income verification details
When it comes to home mortgage loan, a candidate is obligated to present documents that prove that he/she has an essential source of income that is enough to secure the loan. The lender determines if the borrower’s debt to income ratio is reasonable for him/her to afford the loan.
For an investment property mortgage, the income verification process is different. It includes receipts from rents paid by tenants, whether those are rental properties or other real estate investments. In addition, the lender might also check the net income, the cash flow, and related other real estate metrics. Last but not least, the real estate investor might be asked to present a business plan if he/she wants to receive the mortgage loan.
- Mortgages borrowing amounts
For people investing in real estate for commercial use, the down payment is typically higher and might be reaching 25%-35%. However, for people buying homes for personal use, the mortgage loan might reach up to 95%. This leaves the down payment at 5%.
- Mortgage time period
The investment property mortgage generally lasts from one year to twenty years. On the contrary, home type mortgages can last up to a period of thirty years.
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