Investment properties have been widely accepted as a good investment vehicle, but buying one requires some additional research. Unless you have the cash to purchase them outright, you will need to apply and qualify for a mortgage. While the general premise of the mortgage is the same as a Conventional loan for primary residence, the mortgage loan terms and guidelines for qualifying are slightly different.
The first difference is the down payment. When you purchase a primary residence there are many, low down payment options but with an investment property you have to put a minimum of 20% down.
Mortgage lenders typically require this as the minimum down payment when they purchase an investment property. This also helps keep the monthly payment down making it more likely that the borrower will make a profit off the the rents received (or at the least breakeven). On top of having a 20% down payment, mortgage lenders will typically require that you have a certain amount of reserves to make sure you can make the mortgage payment during times of vacancies.
Another difference is the loan term. When you buy a primary residence, you can get a 30 year fixed, 20 year fixed, 15 year fixed, 7/1 ARM etc. As you shorten the term, the better of an interest rate you will get. With investment properties it is slightly different. While you can still get a shorter term, the 30 year fixed pricing on interest rates always makes the most financial sense.
A final difference is the interest rate. Regardless of the loan size, investment properties will always have a slightly higher interest rate compared to a primary residence. Since financing investment properties is “riskier” than primary residences.
If an individual is in financial stress and they own multiple financed properties, they are more likely to not default on the home they live in versus an investment property. If you have any questions about mortgages and investment properties, give us a call at 760-930-0569.