6 Strategies To Get the Best Investment Loan Terms
Posted on 13th November 2023
Are you looking for the best investment loans to purchase a new property in New Hampshire or elsewhere in the United States? You have come to the right place. Use this guide to help shop your lending options and choose the one that allows you to maximize your real estate investment profits.
Opt for a Prepayment Penalty
You’ll find prepayment penalties built into many mortgage loans. A prepayment penalty means the lender charges a penalty if you pay off the loan before its end date. Since lenders earn the most interest at the beginning of the loan, a prepayment penalty benefits them financially.
While the idea of paying a penalty for paying off your loan early may seem less than desirable, many lenders are willing to give lower rates in return for a contract with a prepayment penalty. Even if you plan to buy, renovate, and sell the home in the near future, the prepayment penalty may be much less than the cost of a higher rate. Of course, it’s important to calculate the differences and make sure whichever option you choose makes sense financially for your investment goals.
Consider Loan Length
Mortgage loans are available in different lengths, including 15- or 30-year loans. A 15-year loan allows you to pay off your mortgage faster, but you can expect higher monthly payments. A 30-year mortgage means lower monthly payments, but you’ll pay more in interest over the life of the loan.
The length of your loan should match your investment goals. You’ll likely need a long-term loan if you plan to invest in a single-family property with monthly renters. If you plan to purchase a property in need of repairs, make them, and then sell, you may not need a 30-year loan. Keep in mind that many investors will eventually refinance out of the original loan to obtain better interest rates or to tap into home equity.
Evaluate Loan Structures
The loan structure refers to whether your mortgage has an adjustable or fixed rate. Most homebuyers try to avoid an adjustable interest rate because it can unexpectedly lead to higher monthly payments. However, if you plan to flip an investment and sell it shortly after buying, then an adjustable-rate mortgage may qualify you for better rates.
Some investors may even opt for unique loan contracts, such as an interest-only debt service coverage ratio (DSCR) loan. DSCR loans differ from traditional mortgages in that eligibility depends on the asset’s calculated revenue rather than your debt-to-income ratio. An interest-only DSCR loan means you make the first ten years of payments strictly to the interest, which can reduce the asset’s overall cost.
Consider Alternative Loan Types
Obtaining funding can be one of the biggest barriers in real estate investing, but knowing your options can help you overcome this. Real estate investors have a few loan options to choose from. Conventional loans aren’t always available to real estate investors since they typically have strict credit scores and debt-to-income ratio requirements. A home equity line of credit may be an option if you have existing equity in your current home. Some homeowners may also qualify for a cash-out refinance, which essentially restarts your current loan and allows you to cash out a percentage of the difference between what’s left on your mortgage and the property’s current value.
DSCR loans are a popular choice among real estate investors because they can be easier to qualify for without income. VisioLending offers DSCR loans New Hampshire or other U.S. state residents can take advantage of for all their investment needs.
Consider Your Investment Goals
Your investment goals can also influence how much you pay to borrow funds. Investing in short-term investments, including properties you purchase with the goal of flipping and selling, may allow you to earn faster. However, it can be more difficult to obtain lending with shorter-term investment projects. Some mortgage loans offer better terms for long-term real estate investments since the lender can earn more in interest over the loan term. Additionally, lenders often consider long-term investments to be lower-risk since housing fluctuations usually eventually level out.
Structure Your Investment Through a Business
Some states also allow real estate investors to structure their investments through a business entity or limited liability company (LLC). For example, if you’re considering a DSCR loan, you can borrow through your registered LLC, which isn’t always an option with a conventional mortgage loan. DSCR loans are one of the few that allow LLC financing.
Investing in real estate with other investors can also lower the lending requirements. Many DSCR lenders, for example, will consider the median credit score of multiple borrowers.
A successful real estate strategy requires a careful consideration of how you’ll fund your project and the length of your mortgage. Successful real estate investors commonly use each of these investment strategies to minimize risk and maximize profits. The loan you choose affects how much you pay in extra fees for lending and interest, making a significant difference in how much you earn.
