Conventional Financing

Most Commonly Used

Financing Option

Conventional Financing may be the best financing option for you, but as previously discussed, you can only decide that once you've determined your performance requirements.

There are many different aspects to it, and applies only to 1-4 units. Let's look at all the different areas you'll have to consider:

Long Term - these are the most common conventional financing loans available, with the 15 and 30 year fixed being the most utilized mortgages there are.

Long term financing is great if you plan on holding a property for the long haul, or if you just want to play it safe and make sure that your mortgage payment is locked in so that you don't have to worry about finding new financing in the near future or not knowing if your costs will increase or not.

This kind of financing gives you peace of mind, which as a real estate investor, is priceless.

Short Term - if you plan to hold the property you are financing for a shorter term, say 3-5 years, then there are a couple of different products that can meet those needs.

You can take out a balloon loan, which is a loan that gives you a very good interest rate for a short term, say 3 years, and then at the end of that time you must pay the entire balance of the loan, or face stiff penalties. Obviously, the plan if you use this type of financing would be to refinance the house or sell it, thereby paying off the loan and avoiding the fees.

Another short term option is called an ARM loan, or Adjustable Rate Mortgage. Basically you are given a fixed rate of interest for a fixed period of time, and after that time has expired, then your rate can begin adjusting, either monthly or annually, depending on the terms you agreed to when you took the loan out. Again, the goal would be to either refinance the house or sell before the loan adjusted.

Short term loans are great if you need to keep your payment as low as possible and feel you will be in a position to refinance or sell before the loan term is up. If you have a market shift while employing one of these financing options, you could find yourself having made a very costly mistake, so always proceed with caution and make sure you have a backup plan if necessary.

Whether you pick long or short term loans, both have some Common Factors to consider:

Rate - Interest rate, that is. The shorter the term, usually the better the rate.

Term - 3 years, 5 years, 15 or 30 - the longer the term, usually the higher the rate.

Why is it this way, you might ask. The more risk you are willing to take, the more favorable of a mortgage, hence payment, the lender is willing to give you.

One last component to consider when determining what kind of conventional financing you want to get is whether you will want to pay points or not. A point is a percentage of the loan amount that if you pay, the lender will lower your interest rate in consideration for.

For example, let's say you are getting a $400,000, 30 year fixed loan, for 6%. However, if you are willing to pay one point, or $4000, then they will lower your interest rate to 5.85%. That's an annual savings of $600 dollars. In order for it to be worth it to you to pay the point, you would have to hold the house for 6.67 years ($4000 divided by $600). Otherwise, paying the higher interest rate makes more sense financially if you will be selling the property in less than 6.67 years.

As you can see, deciding on which type of conventional financing to get can be complicated and involves a lot of factors that work together to give you the best mortgage and payment for your purchasing strategy. Taking the time to analyze all aspects of your financing before committing to anything will give you much great returns on your investments!