When deciding upon a mortgage for your investment property, whether that's a 15 or 30 year mortgage or an ARM, figure out what your long term goal is for the property you're buying.
Do you plan on trying to flip the property in a short period of time? Or do you want to hold on to the property and make money through renting it out and then hopefully sell the house in five or ten years? Try using our mortgage length calculator to see what works best for you financially.
To make money with an investment property, the number one factor of course is the interest rate on the loan. What are today's interest rates for mortgages? If they are low, when compared to past history, then it doesn't hurt to take out a long term loan of say 30 years.
Essentially, you'll need to crunch the numbers and see if you can make money on the property through renting it out and paying your loan each month. Then, you have to think about how long you want to hold on to the property.
Are there other opportunities to make money? How long do you plan to live in the house or own the property? Are you going to turn it into a rental property - an investment property? These are some of the questions you have to ask yourself when trying to figure out what type of mortgage to get and for how long.
Perhaps if interest rates are so low it pays to keep that loan for the long term so you have more cash freed up to invest in other real estate markets or buy another investment property. You might even have enough cash to buy a property out right without a loan, but if you interest rates are low then it's smart to borrow money and keep your cash for other opportunties.
Try using one of these mortgage calculators to help you with determining how much interest you will pay and what your monthly payment will be.
Is your goal to avoid paying interest? The bigger the monthly payment you make then the faster you’ll pay off the loan and less interest you’ll pay. Are you anticipating getting a large inheritance in a few years and want to use that to pay off a lump sum, maybe you go for a more risky ARM loan to start, since you have the money to make a baloon payment down the road.
Perhaps you go for the 30 year loan, that gives you the most security since the payments are low but you have the option to make larger payments or pre-pay down the loan—clarify that theses are payments of the principal and not early payments. Believe it or not, some loans actually have pre-payment penalties. The lender wants to earn money from interest and would rather you no pay off the loan. Make sure this is a loan you're comfortable with long term and the terms are clear--you've read the fine print.
If the total loan amount is under $417,000 it is a standard conforming loan, if the loan amount is bigger, then these are known as jumbo loans and the property will require a second loan. But this all depends upon upon how much of a down payment you're able to make.
TIP: Often a lender won't allow for a second mortgage to act as the down payment of a property, as this will affect the back-end ratio of the loan criteria. Creating more debt on your side. The source of the down payment is usually stated by the borrower when applying for the loan or during the under writing of the loan.
Taxes: Lastly, usually you'll get better terms for your loan if you will be living in the property--owner occupied. If you can live in the property for a 2 year period, it might pay off on two ends, in the terms of the initial loan and then not having to pay taxes on the appreciation that's gained--up to $250,000 if you're single and $500,000 if you're married, when you decide to sell the property.