Buying an investment property opens doors to a world of opportunity. Especially in a place like the Bay Area, purchasing investment real estate promises lucrative returns.
Before you can reap the rewards of your investment, however, you must first figure out how to finance the purchase. This part entails some strategic planning and a keen understanding of the types of mortgages at your disposal.
Fixed Rate Mortgages versus Adjustable Rate Mortgages (ARMs)
These are the two primary mortgage types that will help you secure a deal for a profitable investment property:
- Fixed rate mortgage
This basic loan structure features a set rate of interest throughout the life of the loan. This means the borrower pays the same amount throughout the loan term.
Fixed rate mortgages protect buyers from unexpected, significant increases in monthly mortgage payments that usually happen when interest rates rise over time. By paying a fixed rate, it’s easier to plan your budget over the long term – typically
15, 20, or 30 years, in the case of home mortgages.
Among fixed rate mortgages, 30-year terms are the most common because it comes with the lowest monthly dues. The tradeoff, however, is that over the entire term of the mortgage, the overall cost is higher because several of the years are dedicated to paying off the interest.
- Adjustable rate mortgage
An adjustable rate mortgage features a fixed interest for a pre-determined period of time, which usually stretches up to 5 or 10 years. The interest rate is typically set below market rates, extending greater financial flexibility to the borrower. After the initial period, the interest adjusts based on market rates at a pre-arranged frequency.
Adjustable rate mortgages are chosen because the initial mortgage period, with the low interest rates attached, affords borrowers a reasonable amount of time to establish the financial resources they will need for the rest of the loan term. The risk is that the rest of your mortgage can balloon when market conditions dictate a steep increase in interest rates in the years ahead.
Questions to consider in making the best choice
Choosing between these main types of mortgages requires a close review of your personal or business resources, hand in hand with prevailing economic circumstances. Consider your available capital, the state of the market, current interest rates and projections on whether these will increase or decrease over time, and the extent of the economy’s rises and drops.
Here are questions that can help you put the above factors in context:
- How much can you afford to borrow?
- Do you need multiple mortgages for multiple investment properties?
- How long do you intend to live on or own the property?
- Looking at the current market performance; in what direction are interest rates heading?
- Can you afford an ARM if interest rates are trending upwards?
Investors looking for multiple properties – and thus, may require multiple mortgages – are typically better off securing an ARM. The low initial interest rate also gives these investors better chances to generate a decent cash flow to sustain ownership or generate income.
In addition, getting an ARM gives an investor the incentive to resell the property before the fixed rate period is over. This way, the owner can reinvest with a new mortgage on a different income-earning property before mortgage costs become too expensive.
For the best leads on San Francisco homes, condos, and apartments, contact Ray Amouzandeh of TARGA Residential Brokerage. Call 415-494-7009 or email SFHomez(at)gmail(dotted)com today.