Investment Home Loan

By: EconomyWatch Content   Date: 30 December 2009

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An investment home loan is a type of loan that borrowers take to invest in a property, while expecting returns in the future. The property can be classified into residential, commercial and land, and is intended for rental purposes. Moreover, the subject property should not be used as personal residence by the owner for it to be called an investment property.

Investment Home Loan: Interest Rate Types

Investment home loans can be divided into three categories:

Fixed Rate Investment Home Loan: In this, the interest rate and payment amount remains same over the term of the loan. Typically, the term for such loans is 15, 20 or 30 years.

Adjustable Rate investment Home Loan: In these loans, the interest rate is initially set low. However, interest rates tend to fluctuate according to the national financial index. The risk of an increase in the interest rates is borne by the borrowers.

Balloon Payment: This type of loan can be taken when you to keep the property for a limited time. A balloon loan carries lower interest rate and full amount does not get amortized.

Investment Home Loan: How are They Different?

Lenders, typically, charge higher interest rates on investment home loans, since these carry more risk. This is because in case of a primary residence, a borrower is less likely to default on a loan as compared to an investment property. Lenders also require borrowers to have higher cash reserves, usually for six months, to obtain an investment home loan. While offering these loans, lenders also consider the debt-to-income ratio, loan-to-value ratio and credit scores of borrowers.

Investment Home Loan: Where to Obtain One?

Not all lenders offer investment home loans. So, it is ideal to find a lender that also specializes in offering investment property mortgages. Borrowers may get financing for investment property from

·        Commercial Banks

·        Credit Unions

·        Savings and Loan Companies

·        Insurance Companies

Many investment mortgage lending institutions have a requirement of 20% down payment before approving an investment home loan. Some lender may also provide a second mortgage or equity line of credit to enable buyer to make the down payment.

Investment Home Loan: Types of Property

Investment home loans are typically offered for single family homes, duplexes, triplexes and fourplexes. Lenders treat a residential property as commercial property for investment purposes if it has more than five units. Some lenders may not be willing to finance condo conversions, while others may provide financing for commercial units.


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