Understand Your Loan Terms Well

When considering an investment property loan from an institutional lender, you need to consider many of the variables involved in the loan terms being offered.

i. Interest Rate:

The cost of borrowing money, i.e., the interest rate, is one of the most important factors. Interest rates affect monthly payments, which in turn affects how much you can afford to pay for a property. It may also affect cash flow, which affects your decision to hold or sell property.

ii. Loan Amortization:

The amortization method breaks down payments over a number of years, with the payment remaining constant each month. However, the interest is calculated on the remaining balance, so the amount of each monthly payment that accounts for principal and interest changes. For the most part, the more payments you make, the more you decrease the amount of principal (the amount of the loan still left to pay) owed.

iii. Balloon Mortgage:

A balloon is a premature end to a loan’s life. For example, a loan could call for interest–only payments for three years, then be due in full at the end of three years. Or, a loan could be amortized over 30 years, with the principal balance remaining due in five years. When the loan balloon payment becomes due, the borrower must pay the full amount or face foreclosure.