If you’re considering a second investment property, for whatever reason, you have a few options to choose from when considering ways to finance your new investment property. This choice is between a traditional bank mortgage or a private money investment property loan.
Differentiating Traditional Mortgage from Investment Property Loan
First off, it is important to note why you should include a standard mortgage in the equation. This is largely due to the fact that banks know and understand that during a time of financial hardship, a second investment property will likely rank much higher on the list of things you’d sell off than your primary residence, vehicles, etc. Due to this, they consider the risk of the loan fully maturing to be far higher on a second property than a primary residence, which leads to stricter mortgage criteria or, more commonly, a second mortgage or investment property loan.
Investment Property Loan
Basically, the options that a financial institution will offer you are limited to a mortgage or private mortgage. A private mortgage is, for all intents and purposes, a home equity loan, where your new home is borrowed (at least in part) against the equity of your current home. Often, this creates one larger mortgage for the family to pay, rather than two compartmentalized mortgage payments. This can be a decent option for those with a good amount of equity in their home, but will often carry a far higher interest rate, which means that the interest rate owed on your current home could even go up in the exchange. Likewise, banks often want to see up to six months worth of mortgage payments in your account before they’ll consider approving the loan.
Investment Property Loan
Banks love to create second mortgages for homeowners looking to get a vacation home in a destination location, but they approve far less mortgages and second mortgages for an additional home near where your current home already resides. In circumstances where you want to take on a long-term rental property, short-term vacation rental, or otherwise desire a home near your current residence, you are likely left to an investment property loan. These loans will likely carry a different interest rate, maybe over a shorter term based on your qualifying criteria. You can use the investment property loan to quickly purchase and even renovate the property and work on the financing options or sale of the property down the line. Often, the income brought in by properties more than cancels out the cost of the loan.
Our Private Investors
If you’re hoping to walk in and out of a bank with the funds you’ll need for your second home, you may be disappointed; not only do banks tend to dislike the risk/reward additional properties carry, but they struggle to approve the loan quick enough to get you the capital you need when you need it. Private Lending Group was formed to connect private investors with those looking to invest in property in the Greater Chicago Area, including you.