You make money in real estate when you buy, not when you sell. Thatโs why the type of loan product you choose for your real estate financing is so important. In this blog post, youโll learn three key tips to get the best rate on a loan for investment properties and personal homes. Read until the end for some valuable dos and donโts during the loan process!
Tip #1: Know What Loan Products are Available
There are multiple types of loan products available, and the key to real estate financing is knowing how to pick the best one for you. If youโre an investor, itโs important to know what type of loan is best for an investment property. If youโre a homeowner, the best option for you might look a little different. Generally, your options come in the form of fixed-rate, adjustable rate, or government loans.
Fixed-Rate
The interest rate of a fixed-rate loan wonโt change over time, and they typically come in 15-year and 30-year intervals. This makes it a safe option for homeowners. If you do a fixed-rate mortgage as a real estate investor, I strongly encourage you to do a 30-year rate.
Adjustable-Rate
Adjustable-rate mortgages (ARMs) change their interest rate over time. This may sound risky, but it can be a great solution for you depending on your time frame. For instance, if you know that you will only keep a property for five years or so, ARMs have something called a 5-1 product. Your interest rate is locked in for five years then it changes every year after that in accordance with a particular index. There several other types of ARMs, such as 3-1 and 10-1 products, as well.
Government Loans
Government loans (such as FHA loans) are great for people like first-time home buyers. They only require borrowers to put down 3 percent of the purchase price. As an investor, government programs tend to have a difficult qualification process. Itโs certainly not impossible, but it does help to have an experienced broker or loan officer on your team!
[Related: How to Save for a Down Payment]
Tip #2: Negotiate the Cost of a Loan
You can always try to compromise on the terms of your loan. A good rule of thumb is that your closing costs should be well less than 1% of your loan. You should also look at your good faith estimate (also called the settlement statement.) This is the list of costs to the buyer and the seller. Scan this document for junk fees such as administrative costs, doc prep fees, etc.
Many loans have an origination fee that goes directly to the broker shop. A mortgage broker may make 1% of the loan and, in my opinion, you should never pay more than that unless the broker isnโt making anything else on the backside of the loan. (Thatโs called a yield spread.)
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Tip #3: Purchase Mortgage vs. Refinance Mortgage
A key aspect of real estate financing is to know the difference between a purchase mortgage and a refinance mortgage. When you do a purchase mortgage, you purchase a property that you need to have a down payment for. On a refinance mortgage, the property must have already been in your name for six to twelve months.
You can get cash out because refinancing replaces the debt of one loan with another thatโs under possibly better terms. If you refinance, you might be able to get a better interest rate. Itโs something to consider whether you are about to buy a property or you have been in one for the necessary amount of time. Be careful, thoughโwhen you refinance, your credit can take a hit.
[Related: How to Get Pre-Approved for a Mortgage]
Bonus: Dos and Donโts During a Loan Process:
- Donโt apply for new credit anywhere else.
- Don’t close any credit accounts (you can pay them off, though.)
- Donโt max out or overcharge your cards. Never spend more than 50% of your credit limit.
- Donโt consolidate debt
- Donโt cosign on another loan or change your address. This raises red flags to underwriters.
- Do join a credit watch program.
- Do stay current on your credit payments.
- Do continue to use your credit responsibly.
[Related (Podcast): Real Estate Financing: The Credit Score]
