Using a Second Mortgage for Real Estate Investing
Unfortunately, not everyone that wants to get into real estate investing has enough cash on hand to fully fund this type of investment opportunity. But that’s not a reason to worry. If you are confident in your plan, and are comfortable with using someone else’s money and being held accountable for the repayment of such funding then there are still some options for you.
What to do if you already have an existing mortgage.
We’ve heard about the hardships of people having to take out a second mortgage from their primary place of residence in times of need. However, we’ve also heard people boldly mention the idea of obtaining a second mortgage in order to fund an investment opportunity. Well, it’s important for you to know the options that exist when it comes to funding real estate investment projects. Specifically, this type of financing will have some differences in terms of structure and requirements from the loans granted for your primary residence. Take a moment to consider the following options.
Home equity loan. This is essentially a type of second mortgage in which you use the value of your equity in your primary property to secure further funding. It is basically a term loan that is closed-ended. This means that a fixed loan amount is set to be distributed over a set number of periods at a certain interest rate. Generally, the term of these loans is anywhere from 5 to 15 years. Keep in mind that once the amount of the loan is used, you will not be able to receive further funding from it. And once the term of the loan is up, that is it – there’s no chance of renewal.
Line of credit. Lines of credit are also often tied to your equity in your primary property, meaning they are also a type of second mortgage. The reason this and the option above are called second mortgages is due to their nature of being associated with your primary residence. Lines of credit differ from term loans in a few ways. In this case, the lender sets thelifetime of the credit. At the end of its life, the owing balance becomes due. However, you still have monthly payments which must be made based on a variable interest over the life of it. As for the actual funding, a maximum limit is set with which you can draw from and pay off as you go. When you make a payment, it clears the corresponding dollar amount which you can then use again. At the end of the agreement, it is up to the lender as to whether they will renew the line of credit.
Loans geared for “flipping” projects. These are called fix-and-flip loans, which as you might have guessed are suitable for flipping an investment property in a shorter timeframe than if you were to say, rent the property out. Unfortunately, these types of loans come at quite the cost and sometimes have stringent requirements. Specifically, you could experience higher interest rates compared to other options, and shorter repayment timeframes.
Typical bank loans. Last but not least, you could apply for a standard bank loan to finance the operation. This will require that you put at least 20% down payment on the property and potentially even more. The bank will take into consideration your credit history, as well as your other financial obligations to determine whether you can make the payments. Any potential income from the investment property is not factored into the calculations.
Here we have discussed a variety of financing alternatives for real estate investment projects. You may also want to read our article about funding your investments with other people’s money (link to financing with OPM article here).
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