Whether it’s time to progress from renter to homeowner, you want a vacation home to earn passive income, or you want to property flip, investing in real estate is a great way to diversify your investment portfolio. Investing in property comes with high start-up costs. Deciding to invest in property depends on your financial situation and what you can afford to take on. Before you start looking for properties, it’s important to consider how you will finance your investment. Take a look at different types of loans you can pursue to purchase a new home.
Conventional Bank Loans
Most hopeful homebuyers are familiar with traditional loans. A traditional mortgage lender expects borrowers to have 20 percent of the home’s purchase price for a down payment. When applying for a conventional loan, your credit score and credit history are used to determine your borrower eligibility and the interest rate. Your debt-to-income ratio and assets are also considered. Most lenders require borrowers to have a minimum of six months’ mortgage payments set aside.
A traditional loan can be used for the purchase of a new home or to make upgrades to an existing home. Investing in the right upgrades can increase your property value, and the costs can be recouped at the time of sale. One of the best ways to see an attractive return on investment is to remodel your bathroom. An Orlando shower remodel from FHIA can create the perfect shower for your bathroom layout, remodeling budget, and personal aesthetic. All of their customizable replacement showers are made to order. Their shower options include versatile tub-shower combos, traditional showers with doors, senior-friendly walk-in showers, compact showers for small spaces, and showers by Luxury Bath. The bathroom remodel contractor specializes in American-made baths that are durable, damage-resistant, and backed by warranty coverage.
Hard Money Loans
A good option for financing a flip property is to take advantage of a short-term loan. A hard money loan, also known as bridge financing or gap financing, is used to purchase an investment property and immediately pay off the loan. It’s easier to qualify for bridge financing than a conventional loan because hard money lenders don’t consider your credit score and income ratio; rather, they focus on the property’s profitability. The drawbacks to this kind of loan are the interest rates and loan terms. Hard money loans come with higher interest rates and a short loan term between six months and a year. Origination fees and closing costs are also higher than conventional financing.
Northwest Private Lending offers several examples of what is a bridge loan. A bridge loan is a good fit for homeowners who need capital to make a down payment on a new home before selling their existing home. It’s a good fit for real estate investors who are waiting for a flip property to sell and want to purchase the next flip while waiting. Another example is a business owner in need of short-term capital to bridge the gap between income received and expenses being due.
Home Equity Loans
You can tap into your home equity to purchase an investment property through a home equity loan, a home equity line of credit (HELOC), or cash-out refinance. You may be able to borrow up to 80 percent of your home’s equity value to apply toward the purchase, remodeling, and repair of an investment property. There are pros and cons to each type of loan. A HELOC is similar to a credit card and allows you to borrow as needed and make interest-only monthly payments. The interest rate is variable, which means it can increase if the prime rate changes. A cash-out refinance has a fixed interest rate but may extend the loan term of your mortgage, which means paying more interest.
Conventional loans, bridge loans, and home equity loans are some of the types of loans you can consider when investing in real estate.