Thinking about investing in real estate and not sure which loan type to choose? It’s important to know that getting a loan for an investment property differs from a loan for your own home. Let’s discuss the loan types for property investors.
Your Investment Property Loan Options
When you want a loan for an investment property, you usually have two main options: Interest-Only loans and Principal and Interest loans.
Interest-Only Investment Loans
Interest-Only (IO) loans allow you to delay paying back the main loan amount for a few years, typically three to five years. During this time, you only pay the interest on the loan, not the main amount. After this initial period, you start paying both the main amount and the interest. If you’re curious about how much you could potentially get with an interest-only loan, consider using our Interest-Only Calculator for a more precise estimate.
- Lower starting payments, so you have more money for other things.
- Good if you plan to make a profit by selling the property within the interest-only period.
- Flexible, as it lets you wait for changes in your financial situation.
- You’ll pay more in total interest because you’re not reducing the main amount.
- Interest rates might be higher than Principal and Interest loans.
- You might get surprised when the interest-only period ends.
- You won’t build up as much equity because you’re not reducing the main balance.
Principal and Interest Loans
Principal and Interest (P&I) loans mean you pay both the main loan amount and the interest. With each payment, you slowly reduce the main balance while covering the interest.
Why Do Investors Like Interest-Only Loans?
Interest-only loans can be good for property investors because they can claim the interest part of the loan as a tax deduction. The tax office allows investors to deduct interest on loans used for rental properties. This makes interest-only loans attractive for short-term property investments.
But remember, you’ll eventually need to start paying back the main loan amount for your investment property. Interest-only loans can benefit investors, but people who live in the property often do better with standard Principal and Interest loans. Always check the terms before choosing your loan.
What Is a Line of Credit Loan?
A line of credit loan is like a revolving credit account based on the equity in your property. You only pay interest on the amount you use, making it flexible. But be wise with your spending to avoid extra interest charges.
Honesty is the best policy!
When you ask for a home loan, be honest about what you want to do with the property. Interest rates and risks can change based on your loan type. Investment properties are seen as riskier by lenders, so it’s important to be clear about your plans. No matter which loan you choose, some rules still apply: manage your current debts, work on improving your credit score, and show you can handle a mortgage.
Choosing the right loan for your investment property is a big decision that affects your financial future. Understand your choices and their pros and cons. As an investor, you have different loan options, but they should match your investment plan and financial goals.