There are a lot of different types of mortgages available on the market today, but which one is best for you as a real estate investor? Here's a breakdown of the different types so you can decide which best fits you for your investment needs. Let's begin by talking about the top five most common types of financing vehicles for real estate investing. A conventional mortgage is a type of privately backed, lean oriented financing. It's available to borrowers with good credit and enough income to afford its regular monthly payments. A conventional mortgage is the kind of loan that I most frequently see in my real estate business.
There are two types of conventional mortgage loans a fixed rate and an adjustable rate. A fixed rate mortgage has the same interest rate for the entire loan term, while an adjustable rate mortgage has a rate that can change over time. This means that your monthly payments could go up or down depending on current market conditions. Unlike a conventional loan and FHA mortgage is a government backed loan, it's available to borrowers with low credit and potentially limited income. And that's why it's a type of mortgage loan that's very popular among first time homebuyers because it offers more flexible eligibility requirements along with a lower down payment. One of the main benefits of an FHA is that the government is involved in the transaction. They inspect the property to make sure it meets a set of fiscal requirement And if it doesn't, then the loan won't be issued. In addition to being a broker, I was a bank appraiser for a couple of years.
Pre-COVID and you have to take an extra class in order to accept FHA work as an appraiser. And in practice, you have an added set of physical attributes in a building that you have to look for. For example, you have to make sure the electric outlet nearest to the bathroom sink is grounded and you have to look for chipped paint and take added pictures of all outside painted things for approval. This often comes as a significant plus from a buyer's perspective, because it's almost like a second set of eyes on a property. And if something is found to be wrong at the property, the appraiser will request that it be fixed and they'll follow up to ensure that the issues found were in fact remediated. A VA loan is a mortgage loan guaranteed by the United States Department of Veterans Affairs.
The VA Mortgage loan program was created in 1944 to help returning World War to veterans purchase homes. The program was later expanded to include members of the Armed Forces, Reserves and National Guard and all qualifying surviving spouses. The VA mortgage loan program offers a host of benefits to its borrowers, including no down payment requirements and competitive interest rates. In addition, the VA does not charge mortgage insurance premiums, which can save borrowers hundreds of dollars per month when applying for this loan. Just make sure you understand the eligibility requirements well. I have had more than one buying clients not actually be eligible for a VA even though they were veterans. Due to unique circumstances, I believe one was discharged from the military and there were other oddities. So keep that in your mind.
A VA loan is not a one size fits all program. So do your research when beginning your home or investment buying experience. A balloon mortgage loan is a type of mortgage in which the borrower makes payments for a certain period, typically from five to seven years, and then must pay the remaining principal in one lump sum. So, for example, suppose you take out a $300,000 balloon mortgage loan with a six year term, you would make monthly payments for six years, and then you would have to pay the remaining $200,000 in one lump sum. Balloon mortgage loans are often used by people who plan to sell their homes within a few years. This is because the balloon payment allows them to avoid paying interest on the total amount of the loan for a period of time. Balloon mortgage can be an excellent option to keep your monthly payments low. It's also a good choice if you plan to sell your property before the end of the loan term.
Balloon payments are a lot less common today than before the 2008 2009 housing crash. When you hear balloon mortgages, you will most likely think of balloon payments that are wrapped into other deals. For example, hard money lenders sometimes loan money with balloon payments at the end of a short term. So if you're not prepared for the repayment demand or the circumstances surrounding this type of mortgage, the consequences can be great and devastating. So something to keep in mind. A reverse mortgage loan is a type of loan that allows seniors to borrow against their home equity without making monthly payments. The loan is repaid when the borrower moves or sells the home or passes away. Reverse mortgages are available to homeowners age 62 and older, and they're designed to help seniors stay in their homes and maintain independent Many Americans are rightly cautious of reverse mortgages, and that's due in part to a series of national commercials that are still shown today where free info package is offered on the subject. Just doesn't look very legitimate. But this is a legitimate financial vehicle, but only when done with a reputable company.
And it really can be a great tool to better the lifestyle of an elderly homeowner. So you might be wondering why I included her first mortgage in a video on mainly investment properties. While it's commonly known for being used in owner occupied homes. One can use a reverse mortgage on a property if it's your primary residence, and this includes multifamily homes that contain up to four units. So it works as long as one lives in one of the units in his or her building. Similarly, some use the cash proceeds from a reverse mortgage to buy a second home or investment property. So let's recap in part one, we discussed different types of mortgages you can attain when buying a real estate property. We talked of conventional mortgages. FHA is vs balloon payments and reverse mortgages As a real estate investor. It used to take me three months of research to find a property worth investing in. Then I found MASH Pfizer a platform that helps investors make confident decisions within minutes. Start your free trial at MASH. Pfizer Dotcom.
So how do you decide which mortgage type is best for you? Most videos and articles will say, Just do your research, but I wanted to give something a bit more constructive to be used. So here are four steps to help narrow down which type of mortgage is right for you. Find out how much house you can afford. This will help you determine the size of the mortgage that's perfect for you and your investment needs. You can do a few things to help figure out how much property you can afford. One is to look at your financial situation and see what kind of monthly payments you can comfortably make. There's a term called House Poor that we use a lot in the business, and it refers to someone who is making their mortgage payments without an issue but the mortgage payments are so large that the owner can't afford to go anywhere or do anything. But they have a big, beautiful, empty house. They can enjoy. I guess by doing some heavy research now, you can avoid doing that to your investment business.
The Internet has a lot of rather sketchy mortgage payments estimates that are not particularly accurate, but can give you a ballpark estimate to start from. In my experience, your mortgage payment shouldn't be more than 28% of your monthly pretax income. Another way to figure out how much you can afford is to get pre-approved for a mortgage with a licensed mortgage broker. And this will give you an idea of the size of the mortgage that you can qualify for. I mentioned the five most common real estate financing programs available in the real estate market today, but still there are many variations within each type that you can apply for when buying a property which is chosen depends on how long you plan to hold onto the property. If you plan to keep the building for a long time, a fixed rate mortgage may be a better option since the interest rate will remain the same. If you plan to sell within a few years, an adjustable rate mortgage may be a better option since the interest rate can change in flux.
Over time. One can also have a 15 year mortgage with a lower interest rate than a 30 year mortgage, but it will also have a higher monthly payment if you have a limited budget or you plan on keeping the property for a short term. Then a 15 year mortgage might not be suitable for you. This is why a mortgage broker is highly recommended at the beginning of the buying process because you don't know what you don't know and they'll be able to teach you this niche business and really help you navigate the decision making process and adapt it to your individual.
Situation. It's essential to compare the interest rates offered by different lenders to get the best deal. Many people assume that all mortgage lenders offer the same interest rates, but that's not always the case. Lenders may offer different interest rates depending on the type of mortgage you choose and your own credit score. Also, there is a difference between a large bank and, say, a small town credit union. They have different expenses and investor relationships and can work out very different deals for you. There may be additional costs associated with taking out a mortgage such as closing costs. Closing costs are fees that are charged. When you take out a mortgage of any amount. They vary from lender to lender, but they typically include the costs of obtaining a title report, an appraisal fee, a credit check, and you may be charged a fee for the origination of the loan itself.
So here's why it's important to know all of the costs and fees early. Suppose there are too many additional expenses and you have trouble keeping up with the needed payments to close the loan? Or should your financial situation change during the loan origination process? In that case, your sale could fall through altogether. And again, your team should guide you when choosing and applying for a real estate mortgage. And when it comes to closing costs, your mortgage broker, your agent, and most importantly, your closing attorney will be your most significant resources. So let's recap. In Part two. We went over how to decide which mortgage is for you. We talked about figuring out how much you can afford and learning about the loan options you have We learned about the advantages of comparing interest rates and other costs that should be considered during the loan application process.
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