Pros and cons of investment property loan
For investment property, there are usually four types of loans. These are conventional bank loans, private money loans, hard money, and home equity loans.
There are several reasons to invest in real estate. You need a huge amount to spend on investing in real estate. To invest in real estate, you need to research properly. In this way, you can make the right decision to invest in a property loan.
However, various forms of investment property loans have diverse attributes to choose from. And a wrong decision may impact your investment. So let's look into the pros and cons of availing of an investment property loan.
Conventional bank loans
Commonly called the home buyer's loan, it is not secured or offered by a government entity. Instead, it is issued by traditional lenders. Hence they are banks, credit unions, etc.
Pros
These are the following pros of conventional bank loans that you need to know.
· This type of Investment property loan fees & rates is way lower in comparison to other investment property mortgages if the borrower has a good credit score.
· Secondly, it requires less paperwork & is obtained quicker than Government-insured loans.
Cons
These are the following cons of an investment property loan that you should understand.
· Firstly, you need to have a good credit score to qualify for it.
· You need to make a down payment of at least 20% of the property's purchase price.
Private money loans
Secondly, these types of loans are commonly used terms in finance & banking. It refers to the loan offered to an individual or company by a private organization. Usually, these are short-term loans from relatives or friends. For these rental loans to work, you need to have a high level of faith between the parties.
Pros
However, these are the following pros of private money loans
· Firstly, you can negotiate the terms and conditions and fees.
· Almost none or very few financial documents are required for your approval.
Cons
These are the following cons of private money loans
· Apart from that, the interest rates would be typically higher than traditional loans.
· Usually, the repayment period is short for these rental loans.
Also Checkout Free Apartment Application
Hard Money loans
Additionally, it's an asset-based investment property loan through which you'd receive funds secured by real property. Usually, hard money lenders are private companies or investors. They can issue short-term loans with your property as collateral.
Pros
These are the following pros of hard money loans.
· Being more flexible than traditional banks, you don't have to give these lenders a lot of information for approval. Similarly, your current credit ratings won't matter either.
· While most banks ask lenders to put down a hefty amount as a down payment before even approving the loan, hard money lenders, on the contrary, will often finance you. Then even without any down payment.
Cons
These are the following cons of hard money loans.
· These can be very expensive since the lenders charge high investment property loan fees and rates.
· Since they are most suitable for short-term projects, the lender would expect a quick recovery from you. If you are struggling to make repayments, the lender might acquire the assets that are collateral.
Home Equity loans
This is a type of consumer debt that is also known as a second mortgage or home equity installment loan. Furthermore, it allows you to borrow against the equity of your home. These loans are fixed rates. Hence, the loan amount is based on the difference between the home's current market value & the homeowner's mortgage.
Pros
Note these following pro facts about home equity loans.
· It provides an easy source of cash if you have a reliable and steady source of income. In addition to low rates of interest and possible tax deductions, it's a sensible choice.
· Secondly, this rental loan is much simplified since it is a secured debt. With a simple credit check, the lender can determine your creditworthiness & approve the loan.
Cons
Some of the following cons of home equity loans.
· There is always a risk of losing the property in case you fail to repay the investment property loan.
· Typically ranging anywhere from 2% to 5% of the loan amount, closing costs will have to be paid by you. Though in exchange for a cost reduction, if you pay off & close the loan within a certain period. Hence, you may have to repay some of these costs.
Federal Housing Administration loans
Therefore, it is insured by the government & issued by an approved bank. It has lower down payment rates as compared to traditional loans. Usually, applicants may have lower credit scores. Hence, it is designed to help low to moderate-income families attain homeownership.
Pros
Therefore, these are the following pros of housing administration loans
· FHA loans require very low down payments compared to conventional mortgages.
· To qualify for these is easy since it requires lower credit scores than traditional loans.
Cons
Some of the cons of housing administration loans are listed here.
· It may not be convenient for some investors since you must live in one of the units for at least a year.
· To be approved, your property has to be in good condition.
Conclusion
Financial investments are subject to market risk. Therefore, it can be tricky if your idea is unclear how to secure financing. Thus, always carry out an in-depth analysis of different investment property loans before deciding.
