You know to strike while the iron is hot and with the variety of real estate bargains surrounding you at every turn, you know the time is now to make your move. But before you move you need to weigh your options based on the type of real estate investment you plan on making.
Do you plan on purchasing a property and treating it as a rental investment for a period of years, maybe even decades? If so, you may benefit from choosing a traditional fixed rate mortgage. By locking into a fixed rate mortgage, you will know you exact monthly payments for the lifetime of your loan. The rent you charge should then include enough money to cover the mortgage, taxes, any community fees that may be due, as well as some profit.
Perhaps you enjoy a higher real-estate investment and plan on buying a low-cost fixer upper, revamping the property and then selling it at a profit within a couple of years time. If that is a case then an adjustable rate mortgage (ARM) might be the best mortgage option for you. Adjustable rate mortgages tend to offer lower interest rates then traditional rate mortgages as you, the borrower, are taking the risk that the interest rate may increase, not the financial institution you may be borrowing from. You can take advantage of the discounted interest rates and sell the property, repay the loan and make a profit before the term rate resets.
In general, there are six basic mortgage options that a real estate investor may choose:
- Fixed Rate - The most predictable of the mortgage options but may not have the lowest interest rate
- Adjustable Rate (ARM) - Typically has a lower starting interest rate than a fixed rate mortgage, but the borrower assumes the risk of the interest rate going up over time
- Interest Only - Low interest rates as borrowers are only paying towards the interest rate, not the principal at the beginning; rates will go up over time
- Zero Down - Extremely risky mortgage that requires no down payment for the property in question, but if you cannot sell your investment in a timely manner you will be saddled with a large mortgage
- Balloon - An amortized mortgage that lasts longer than the term of the loan, resulting in lower monthly payments but re-financing at the back end of the loan
- Exotics - A mortgage that is not like anything else you have ever heard of and should be avoided because of the large risk factor
All mortgages come with benefits and risks. It is entirely up to you what option you may choose as what may be best for you may not be the best option for someone else.
