Understanding the differences between rental property loans and mortgages
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So you have finally thought of investing in the idea of rental properties? Well, congratulations. That’s a giant leap in itself to become a landlord.
But, wait. Are you someone who has a blurred picture of real estate terminologies like mortgages and rental property loans and does not know what exactly they hold? Well, the confusion’s time up.
We are here with a new article to break down the meaning of these terms while conveying the difference between them.
Yes, all you need to do is just sit back, relax, and walk yourself through this bundle of knowledge to have fresh and meaningful insights on the difference between rental property loans and mortgages.
What are rental property loans?
Rental property loans are the type of first-lien rental investment loan that is secured by the single-family residence (SFR). It is for the use of the tenant rather than the owner. A crucial aspect of gaining rental property loans is that the property should be well-prepared enough before qualifying for the loan.
Furthermore, the tenant is usually leased for a short period and the rental property loans are more appropriate for short-term rentals like vocational rentals. Lastly, remember that the rental property loans are given by the banks keeping the future rent of that very invested property as a security for the coming years.
Why do you need rental property loans?
If You are thinking of investing in a rental property to generate more income but you consider your funds insufficient, getting a rental property loan is your go-to solution. No wonder you require a time and money commitment but buying any investment property is a good way of earning a passive income.
Yes, it’s true.
One advantage of investing in a rental property is recurring income. You need little to minimal effort to maintain your property. It can be a once-in-a-lifetime investment to gain profits forever, provided the good health of the property.
What are mortgages?
In simple terms, a mortgage is a legal agreement between you and the lender. The lender can be a bank, building society, or any other person who lends the money at a certain rate of interest. Now the catch is that the lender has the right over your certain property or assets.
But how?
In return for lending money, the lender can snatch away your property rightfully if you fail to repay the money at any time. Now this money also includes the interest. Basically, the mortgages are used to buy a home or simply borrow the money. But again, it is done against the value of a home that you already own.
One such example of a mortgage is the Asset-Backed Loan (DSCR) which means the debt service coverage ratio. One perk of availing a DSCR is that you don’t have to verify your income. It is a measure of the cash flow available to pay current obligations.
Why do you need mortgages?
Want to purchase a property but don’t know how to finance it?
Get a Mortgage loan.
A mortgage is a type of loan that is used to finance the purchase of a property. You can get mortgages for fulfilling a variety of financial requirements. From home renovation and business expansion to medical emergencies and higher education for your kids, mortgages are there to back you.
Lastly, a mortgage is a great way to purchase a loan and make monthly payments while the value of the home increases gradually.
The difference between rental property loans and mortgages
Now that you are aware of the basic meaning of Rental Property Loans and Mortgages, let’s find out some crucial differences between these two:
Interest rates
Understanding the rates is key when you are considering any investment. If we talk of the interest rates, these are always higher for rental property loans as compared to mortgages. Though the current market situation, the type of loan, and the credit score of the lender may also impact the interest rate but, it is still lower for mortgages than rental property loans.
Risk associated
Rental property loans are considered riskier as they are not secured by any primary residence. On the contrary, mortgages are also risky but not as riskier as rental property loans because they expose you enough to market volatility.
Down payment requirements
The rental property loans have more down payment requirements. It is around 15-20 % of the purchase price. On the contrary, the mortgages won’t come with this high down payment on a primary residence.
Credit score requirements
A solid credit history is a crucial factor in securing a rental property loan as compared to mortgages. This is because investment loans are more risky than mortgage loans.
The bottom line
This article has tried to cover the meaning and difference of mortgages and rental property loans in detail. In a nutshell, consider your options, and requirements and get in touch with experts to know where you are positioned to secure a loan and thrive your business.
