Before an investor can even begin his/her quest for the perfect deal, he/she has to take the first step in the deal making process. Doing research, looking at properties, and locating the deals are secondary. First and foremost, an investor has to put the funding for the investment into place. Let's face itwithout the money to seal the dealthere is no deal.
Figuring out what type of funding would work best for your particular situation is the first part in this course of action. Among other creative methods of financing, a deal can be more traditionally financed either through a private lender or through a conventional loan. There are several types of mortgages that are available and they all have variable contingencies. Finding the one that will be the most beneficial to you is dependant on you and your current financial situation.
By definition, a mortgage is the loan you obtain to bridge the gap between the initial down payment amount and the total purchase price of the home or property. Payments are typically made on a monthly basis and previously negotiated interest rates are applied to these monthly payments. There are several factors to consider when deciding which type of mortgage you want to engage. For example, a mortgage can have a fixed-rate or an adjustable rate and either be a negative amortization, a balloon, or a hybrid loan.
The difference between a fixed-rate and an adjustable-rate loan is simple. As the names suggest, fixed-rate loans offer rates that are unchanging and are typically issued for fifteen or thirty year terms. With these loans, the monthly payment amount and the interest rate paid monthly is unwavering. On the other hand, an adjustable-rate loan (ARM) has a variable interest rate, which usually is adjusted every six to twelve months, but can change even on a monthly basis.
Each type of loan is unique in its own way. For example, amortizing the mortgage, or making monthly payment over time to reduce the balance of the loan, gradually reduces the amount owed on the loan. Some ARMs cap the increase of each monthly payment, so the unpaid interest amount is not paid monthly but is added to the amount of the outstanding debt. On the flip side of this scenario, negative amortization loans allows for a reverse process. These types of loans are a good route to take when an investor wants to avoid adjustable interest rates and terms.
Negative amortizing, or increasing the size of the loan balance, affects the overall loan amount only the minimum payment per month is required and additional interest is added to the overall balance of the loan. Additional interest on the loan is accrued over time which could offset an the original financial pre-requisites that both an investor and a lender may have based the loan amount on. For this reason, negative amortization loans are generally considered to be more risky, but they are available to be negotiated. They key is to assess whether or not this type of mortgage would be the ideal match for your particular financial situation.
Another type of mortgage to consider is one that offers a balloon payment. Balloon loans offers a fixed interest rate that is generally lower than other fixed rate loans with terms of either five, seven, or ten years. At the end of the negotiated term, the entire balance of the loan is due. These loans are often to attractive to investors who do not have much money upfront, but feature a substantial amount to be paid at the end of the negotiated terms. There are hefty risks tied to balloon loans as well and that probably why they are also referred to as bullet loans by players in the real estate arena. If the term of the loan ends during a time of high mortgage rates and the balance is due and refinancing is not an option, it may feel like being hit by a bullet. A balloon loan is more of a short term funding solution.
Hybrid loans, also referred to as Intermediate ARMs, as their name suggests, offer a mix of terms and conditions. They can be either fixed-rate or adjustable-rates or a collaboration of both. Terms of five, seven, or ten years with a fixed-rate are assigned and these rates can then convert to and ARM, where the interest rates are adjusted every six or twelve months.
The best financing for each deal may be different depending on the financial situation of the investor and the home or property in question. After all of the factors have been considered and all of the numbers have been evaluated, the next step is negotiating the terms and conditions of the mortgage and putting it in place.
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