Can You Call An Investment Property A Second Home
Tempted to call your investment property a second home and take advantage of some of the second-home perks, like a lower down payment and interest rate?
Dont be. In the mortgage world, you need to call it what it is whatever it may be.
It is absolutely imperative that borrowers are completely transparent when disclosing to their lender the intended use of the property to ensure that they receive the appropriate product and rate, Joseph says.
Joseph adds that borrowers may be asked to sign a document verifying their intended use of the property, so theyll have to indicate in writing what they plan to do with the home. Deceiving a lender otherwise could have serious consequences.
Intentionally misleading a lender constitutes mortgage fraud, Joseph says. Not only is it unethical, its illegal and could result in criminal prosecution.
Less In Total Interest
A 15-year mortgage costs less in the long run since the total interest payments are less than a 30-year mortgage. The cost of a mortgage is calculated based on an annual interest rate, and since you’re borrowing the money for half as long, the total interest paid will likely be half of what youd pay over 30 years. A mortgage calculator can show you the impact of different rates on your monthly payment, as well as the difference between a 15- and a 30-year mortgage.
Should I Refinance For 15 Or 30 Years
Should I refinance for 15 or 30 years? When refinancing a rental property, think about your long term and short term goals.
Q: I am interested in refinancing a rental property that qualifies for the Home Affordable Refinance Program . I owe $91,000 on the first mortgage and I have a second mortgage at $19,000. The first mortgage is at 6.75 percent and Iâm paying $630 per month, without real estate taxes and insurance. And Iâm paying $180 on the second mortgage. Both of these are 30-year loans.
The bank has given me the following good faith estimate: a 15-year fixed rate mortgage at 3.75 percent. My payment will be $816 with real estate taxes and insurance included, which is actually a savings for me. They wonât roll in the second mortgage, so Iâm still stuck paying the $178 per month.
The rental income is $1,050 per month. It covers the mortgage and if I work to pay off the second loan, I could probably have the first mortgage paid off in even less than 15 years. The bank also gave me a scenario for a 30-year mortgage, but paying off the loan faster makes me happy inside!
What do you think? Is this a good deal? I value your opinion.
A: There are two schools of thought when it comes to paying down a rental property.
The question is which scenario is closer to your true short- and long-term goals for the property and your personal finances?
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Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our mortgage reporters and editors focus on the points consumers care about most the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more so you can feel confident when you make decisions as a homebuyer and a homeowner.
How Do I Shop For Current Investment Property Mortgage Rates
NerdWallets mortgage rate tool can help you find competitive investment property mortgage rates. In the “Refine results” section, enter a few details about the loan youre looking for and select “Investment property” from the “Home purpose” drop-down menu. Youll get a personalized rate quote in minutes, without providing any personal information. From there, you can start the process to get preapproved for an investment property loan. Its that easy.
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Debt Service Coverage Ratio
The DSCR is calculated as the Net Operating Income from the property divided by the annual mortgage payments , where NOI is total income of the property less operating expenses. The DSCR ratio should ideally be over 1, meaning that the property is generating enough income to fulfill its debt obligations. The higher this ratio is, the easier it is to obtain a loan.
|Net Operating Income||= Rental Income â â Operating Expenses|
|DSCR||= NOI /|
When looking at the NOI, lenders will make sure the stated income and expense data are accurate, supported and reasonable. For instance, if the allowance for vacancies and collections is atypically low, a lender may substitute in higher âmarketâ vacancy and collection rates.
Typical operating expenses subtracted from rental income include taxes, insurance, repairs and maintenance, utilities and property management fees.
Tips For Managing Your Housing Costs
- Work with a professional. While financial advisors typically associated with investment advice, they can also evaluate your housing costs and help you potentially find savings in your budget. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
- Mortgage rates are more volatile than they have been in a long time. Check out SmartAssets mortgage rates table to get a better idea of what the market looks like right now.
- Consider your options. Dont know whether now is the time to buy or continue renting? SmartAssets Rent vs. Buy Calculator can help you determine which is the better financial move based on where you live.
- Dont forget about property taxes. If youre thinking of buying a home, dont forget to consider property taxes. Depending on where in the U.S. youre planning to buy, property taxes can vary dramatically. Use SmartAssets Property Tax Calculator to get a sense of how much your annual tax bill may be.
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Why Is A 30
Many people have a tough time saving money and the higher your mortgage payment is, the harder it will be to save. Having an emergency fund is very important for financial stability. If you do not have an emergency fund, do not get a 15-year mortgage. Get the 3o-year mortgage, and save up for the emergency fund. Once the emergency fund has enough money you can pay off your mortgage early if you would like to.
Remember that you see no real benefit to paying off your mortgage early unless you pay off the entire loan, refinance, or sell. Your house payment will stay the same until the loan is paid off in full. If you need to access the equity you have in your house, you cannot ask the lender to give you back what you have paid early. You will have to sell the house or get a brand new loan .
If you get a 15-year loan and have a medical emergency, lose your job, or cannot work, the bank will not lower the payment for you. You have to keep paying that high mortgage payment every month. If you had a 30-year mortgage and were paying more to it every month, an emergency would not be nearly as devastating, because you could stop paying extra.
The Advantages Of A 30
The 30-year mortgage is the most popular option for homeowners in the US for many reasons. But one of its main advantages is that the payments are stretched out over a period thats twice as long as a 15-year mortgage, which means 30-year mortgages have lower monthly payments. Those lower payments make it easier to afford a home, or to buy a larger home and still stay within your budget.
According to Juan Carlos Cruz, founder of Britewater Financial Groupin Brooklyn, New York, a 30-year mortgage is ideal when the loan amount is large and amortizing it over 15 years makes the payments too much to handle, or the buyer wants more purchasing power on a greater home that they can pay off over the 30-year mortgage.
With a lower monthly payment, youll have more money to spend on other household expenses, or you can even use the extra cash to turn around and make more money.
If your money can make a 10-year annual average of 8% in the market with a diversified portfolio minus fees of investment advisors and hidden mutual fund fees why would you hurry and pay your 3% mortgage loan? asks Carolyn Mescher, a CPA, and principal at Magnolia 313 Accounting Services in San Luis Obispo, California.
Invest the additional cash youre saving with a 30-year mortgage versus a 15-year term, and the 5% difference between the 8% youre earning and the 3% interest youre paying would then compound over 30 years, explains Mescher.
More flexibility in payback terms
Larger tax deduction
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Enable Increase Of Rental Income
If your refinance lets you lower your monthly payment or cash in on your equity, you can then use that freed-up cash to make the kind of investments that increase the income your property creates. You can update the property, repair items that need to be fixed, or add amenities that will justify a higher rent.
The Math Behind Investment And Rental Property Loan Rates
Behind the scenes, the rate your mortgage lender charges isnt totally up to the lender. Property lenders often adjust rates to meet rules set by Fannie Mae and Freddie Mac.
Fannie and Freddie set rules andfees for most mortgages today and the fees they charge directly affect thefinal interest rate you pay.
Thanks to the increased risk ofpurchasing or refinancing investment properties, Fannie Maeand Freddie Mac charge higher fees on those transactions. Their fees trickledown to you as a higher interest rate.
|Type of investment property|
Rates shown here are a sample set meant for comparison only. Your own rates will vary. Get a personalized investment property interest rate here
For instance, a 20-percent-downinvestment property loan would require a fee equal to 3.375% of theloan amount.
This is the same as $3,375 foreach $100,000 borrowed.
In most cases, the borrowerchooses to pay a higher interest rate instead of extra dollars in closing costs. So,how do these fees translate to your final rate?
In this case, 3.375% ininvestment property loan fees can be covered by an extra 0.5% to0.75% added to therate.
Keep in mind this is fora single-family home. Buy a duplex and you might pay another1.0% infees or 0.125% to 0.250% added to your rate.
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The Effect Of Interest Costs
You’ll pay less interest with a 15-year mortgage than you would on a 30-year mortgage. Fifteen-year loans typically come with lower interest rates than 30-year mortgages, so youll pay less interest right from the beginning.The longer you borrow, the more interest you’ll pay overall. Your loan balancethe amount that you’re paying interest onwill remain higher for a longer period of time.
Look at an amortization calculator that shows monthly payments, monthly interest charges, and your running loan balance to see how the process works.
The Ideal Situation To Take Out A 15
If I was forced to take out a 15-year mortgage back in 2003, I likely would not have bought the condo when I did. The increased monthly payment would have perhaps been too much. Therefore, I would have probably waited at least another year and lost out on a $46,400 paper gain. From 2003 2004, the San Francisco real estate market went up about 8%.
To save $46,400 in interest expense with a 15-year mortgage that is 0.5% lower than an ARM, it would take nine years and three months with a $1 million loan. In other words, among other things, take into consideration the future of the housing market when choosing the type of mortgage.
For first-time homebuyers, it is probably best to take out an ARM, followed by a 30-year fixed mortgage to get neutral the real estate market.
In the past, Ive written the best time to buy property is when you can afford it. Shorting the housing market by renting long-term is a tough way to build wealth. Inflation is too powerful of a force to go against.
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What Can I Do With An Investment Property
There are several uses for a residential investment property, including:
- House flipping, which can be done after making home improvements that increase the propertys value
- House hacking a multiunit home, which allows you to live in one unit and rent out the other unit to cover your mortgage payments and create a passive income stream
- Providing short-term rentals through a platform like Airbnb
- Providing long-term rentals in six- to 12-month increments
We Make It Easy For You To Invest In This Buyers Market
- Get preapproved for an investment property loan before you begin your property search to leverage your bargaining power.
- Our industry-leading online tools will help you close your loan in less time than most other lenders.
- Need a real estate agent to guide you through the process? Our sister company, Rocket Homes, can connect you with a top-rated real estate agent with your best interests in mind.
For more than 30 years, weve helped thousands of Americans make smart investments. We can help you, too. Contact us today at 251-9080.
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How Often Can I Refinance
Typically, theres no limit to how often you can refinance your mortgage, though some lenders and loans may require some seasoning of the loan before youre eligible. This is essentially just proof you can make your payments for a few months. For example, FHA loans require six months of payments before you can refinance your mortgage.
Easier To Get Positive Cash Flow On A Rental Property
If youre buying a rental property, or if you might convert your personal residence into a rental later, itll be easier to turn a monthly profit on the property with a longer mortgage term and a lower monthly mortgage payment.
In order to get positive monthly cash flow from a rental property, the rental income needs to exceed the propertys monthly expenses, repairs and mortgage payment, explains Mescher. With a 30-year mortgage, the monthly payment is less, so you can achieve positive cash flow even when the rental income is lower, she adds.
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Pros & Cons Of Investment Property Loans For Nc & Sc Homeowners
Lets start with the positives. An investment property loan is a convenient financing tool that allows a savvy borrower to catalyze their net worth. Unlike stocks, which are fairly volatile, a two-bedroom cottage is a tangible investment that appreciates over time. That quaint home can also offer passive rental income or, with some sweat-equity, be flipped to generate a large lump sum.
But investment property loans arent all sunshine and shiplap. These lending instruments are hard to come by. Without a superb credit score, big down payment, and low debt-to-income ratio, a lender may not give you the time of day. If you do get approved, expect your interest rate to be 0.25% to 0.75% higher than that of a primary residence mortgage.
Investment Property Loan Rates Vs Conventional Loan Rates
Investment property loan rates are almost always higher than conventional loan rates, including second home loan rates, due to the steeper risk an investment property poses compared to a primary residence. If you plan to rely on the rental income from a tenant to contribute to the mortgage payments for the investment property, theres a greater possibility you could default on the loan if your tenant fails to pay rent.
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Conflicted With 15 Vs 30 Year Mortgage For First Investment Property
I would appreciate any insight / thoughts people have about this topic.
I grew up with real estate being in my family. My parents currently own four investment properties in addition to the home they live in. Two of those investment properties they own clean and clear and are paying off their residence in 2016.
That all being said, they took out 15 year mortgages for all of those which is contrary to the popular belief that you read here / almost any blog on the internet. I am sort of in a predicament because I too intend to buy my first investment property myself as I truly do enjoy the business myself and see the amazing benefits of passive income.
I just can’t seem to decide what would be better, the 30 or 15 year mortgage. I see the benefits of positive cash flow from day one as being a huge deal since that can create the snowball effect and thus enable me to purchase more properties faster. But seeing my parents sort of changes that perspective for me since it was almost like they sacrificed that negligible cash flow for a promising guaranteed return.
Real estate would be a side business as it is for my parents, and my strategy as for now is a buy and hold strategy, with the possibility of selling those properties when/if they were to appreciate and convert those earnings into better properties.
What are all of your thoughts on this common debate?