When your planning to get involved in the landlord business, there will always be a big possibility that you’ll have to borrow some money to help facilitate your venture.
However, real estate financing isn’t as simple as just getting a mortgage. Real estate landlords must analyze and consider the types of mortgages based on their business model. This will not only help you figure out what perfectly suits your needs but also maximize the cash flow from your investment.
Here are, some types of mortgages that you must consider as a landlord:
- Balloon Mortgage
This type of Mortgage usually has a due date much sooner than the typical 30 year mortgage. Typically, the entire balance is due in 5-7 years, even though the monthly payments are still amortized over 30 years. Because balloon mortgage lenders like knowing that their loan will be paid off much sooner than standard mortgages, the interest on balloon loans are lower. If you are a real estate investor planning to hold the property to get rent but still sell in 5 to 7 years, this type of mortgage makes sense.
- Interest Only
Interest only mortgage allows you to pay only the interest on the loan, allowing you to have lower payments since the principle portion is not there. It is important to note that this type of mortgage is only worth it if your purchasing a property with good indications that it will appreciate. The reason is because since the principle doesn’t get reduced, there is the risk of being underwater if the property depreciates over time.
- Hybrid mortgage
Also known as variable rate mortgage that is fixed for a certain amount of time, usually 5, 7 or 10 years. After the fixed block, the rates would only change once a year. Variable rate mortgages have lower rate than a standard fixed rate. This hybrid of the two allows a landlord to still have the long term predictability of fixed rates with the lower interest rates of an adjustable mortgage. The federal prime index rate will determine the changes of the variable rate.
Be reminded that these types of mortgages may not indicate your success or failure as a landlord. Many times success comes from managing the properties correctly. But having a mortgage designed for landlords that allows you to have lower payments than standard mortgages gives cushion if any issues arise with rent collection or large maintenance expenses. Speaking to a variety of lenders will allow you to learn the pros and cons of each loan product, that way you can best understand your options and be confident with your decision.