If you are in the market for a mortgage for a second home or a rental property, there are a variety of tools and mortgages available to you. Before you begin your search, you may want to consult a mortgage calculator to see the mortgage amount you can afford. In addition, understanding mortgage terms and benefits are important to make sure that you secure the right loan for your particular financial situation. The economy should also play a role in your decisions. Consider the following:
–Interest only mortgage. When borrowers take this type of mortgage, they agree to pay the interest only for a set amount of time. No money is paid on the principal. After a time, borrowers have the option to convert the mortgage to a different type of mortgage such as a fixed rate mortgage.
Interest only mortgages are a good choice for those with little or no money down and for properties that are anticipated to increase in value rather than decrease. Many people use these loans to pay for a second home or a rental property. However, these loans are not without risk. If the property value decreases instead of increases, the loan may be difficult to convert to a standard mortgage, and the borrower will lose money when selling the property.
-Buy to let mortgages. Unlike interest only mortgages, buy to let mortgages typically require that the borrower have at least 25% to put down on the property. In addition, the amount available to borrow is based in part on how much income the property is expected to generate each month. (Ideally the property should generate 125% of the monthly loan payment.)
If the rental property increases in value, the borrower will be able to charge more for rent while still paying the same mortgage payment, thereby increasing his profits. However, like an interest only loan, if the property value declines, the borrower can find himself losing money because the property will command less rent and he may pay more out of pocket to meet the monthly loan payment. However, the majority of buy to let mortgages do result in a profit for the borrower.
If you are looking to enter the rental property market and are not sure which loan is right for you, carefully consider your financial situation, the economy, and whether the property is likely to increase or decrease in value in the upcoming years. Both interest only loans and buy to let mortgages carry their own set of unique benefits and risks. Make sure you are familiar and comfortable with both before signing the mortgage and making the commitment.