HELP!! Need Advice for Mortgage for investment property

8 Replies

Hello,

I am in the process of purchasing a multi-unit property. I need help in deciding which mortgage to choose out of the options below. Please give me specific answers keeping in mind that all other terms are the same for all of the options below.

1) Bank A

Fixed interest rate = 4.375%

Fixed Period = 5 years

Repayment Loan term (balance due in) = 5 years

Amortization = 15 years

2) Bank B

Fixed interest rate  = 4.5%

Fixed Period = 5 years

Repayment Loan term (balance due in) = 15 years

Amortization = 15 years

3) Bank C

Fixed interest rate = 4.7%

Fixed Period = 5 years

Repayment Loan term (balance due in) = 20 years

Amortization = 20 years

4) Bank D

Fixed interest rate = 5.35%

Fixed Period = 10 years

Repayment Loan term (balance due in) = 20 years

Amortization = 20 years

Thanks,

Saran

Bonnie -- There are no pre-payment penalty for any of the options mentioned above. Not sure about Yield Maintenance fees, will ask. Which loan out of the options above do you think is better?

Thanks

Saran

Originally posted by @Bonnie Staples :

Hi @Saran Mandhadapu - also be sure to ask about "pre-payment penalties" or "Yield Maintenance fees" as this can be a Big cost depending on your exit strategy.  

 There are no pre-payment penalty for any of the options mentioned above. Not sure about Yield Maintenance fees, will ask. Which loan out of the options above do you think is better? The loan amount is less than 100K.

Thanks

Saran

Hi @Saran Mandhadapu - The best loan for you is based on what your objectives are and what your exit strategy is.  If you have a good Lender/Mortgage Broker - they can help you choose the right loan that fits your property, your business model & your exit strategy. 

I hope you find this helpful!! 

Best to you!! 

Are you not able to get a loan with a Amortisation longer than 20 years. The longer the better for investment income properties. You want as little equity lying dead in the property as possible to increase the cash flow from the property itself. Paying a return on your equity is far greater than any prevailing mortgage rates.

I generally take 30 year where possible, 3-5 year term, variable rate. Historically variable rate mortgages have always been less over the long haul. 

Originally posted by @Thomas S. :

Are you not able to get a loan with a Amortisation longer than 20 years. The longer the better for investment income properties. You want as little equity lying dead in the property as possible to increase the cash flow from the property itself. Paying a return on your equity is far greater than any prevailing mortgage rates.

I generally take 30 year where possible, 3-5 year term, variable rate. Historically variable rate mortgages have always been less over the long haul. 

 This is a 5 unit multi-family commercial loan. The max amortization I was quoted was 20 years. Do you think amortization matters or the fixed rate term of 10 years as opposed to 5 years matters considering the rates are low currently and will most likely be higher after 5 years?

The market has priced the risk of rising interest rates in the interest rate charged.  So you could look like a genius if they skyrocket or overpay if they stay flat.  So we'll leave those crystal balls to the bank.

The longer amortization schedule will keep payments down and have less principal reduction maximizing your return on equity which is what @Thomas S. is referring to.  And you can always pay extra to make a 20 year loan amortize in 15 years.  This frees you from the higher payment obligation in tight months.

A couple of other factors you should consider are 1) if the bank will let you reset the amortization schedule at the 5 year interest rate reset and 2) the cost of refinancing a balloon.  Depending on the closing costs of a hard refi and the amount of the loan, a 5 year balloon could get expensive.

And remember you should be able to reset the interest rate at any time within the 5 year period.  It will have some associated costs, but if you're at year 4 and it looks like interest are going up, you can lock in another 5 years early.

I'm most comfortable with loans that resemble C.

I almost always prefer a longer fixed rate term for buy and holds.   I think we're taking these low interest rates for granted and they will eventually increase.  I would choose D.

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