Deciding between Real Estate Financing Options
Trying to decide between the many different types of real estate financing options when making a real estate purchase can be almost as difficult as deciding between your choices in properties. Many buyers find themselves asking whether it would be best to go with a fixed rate mortgage or an adjustable rate mortgage and whether they should put down only the minimum down payment or make a higher down payment in order to drive down the mortgage notes. Understanding the ramification of each available option can help you to not only save money now, but down the road as well.
First, it’s important to understand when choosing between a fixed rate mortgage and an ARM that your purpose in purchasing the property can play a tremendous role in which option will benefit you the most. Most first time home buyers and new investors tend to be swayed by two factors; they either fall in love with the idea of a lower interest rate through an ARM or they like the security offered by a fixed rate mortgage. Generally speaking, if you plan to finance out the property over a period of years and you do not anticipate liquidating the property within the next three to five years; a fixed rate mortgage is probably the best choice because it will cushion you from whatever may happen in the interest rate market over the next fifteen to thirty years. However, if you plan to flip the property or believe that you may be moving sometime in the next three to five years; you may not need as much cushioning and will be in a better position to take some risk in terms of the interest rate. In this scenario, the ARM may be more suitable to your needs.
In terms of whether you should make the minimum down payment required or make a higher down payment in order to drive down the loan value and subsequently your mortgage notes, there are also a couple of factors that you should consider. Many older people feel that debt is inherently a bad thing; however, in some cases it can provide some noticeable benefits. For example, mortgage interest is tax deductible. This is a definite benefit.
In some cases; however, it may be desirable to try to drive down the loan value at least to a certain degree. One of these situations would be if you are subject to private mortgage insurance. If you are able to do so, making a higher a higher down payment can bring your loan to below that all important 80% loan to value ration and subsequently allow you to ditch the PMI; which will ultimately save you money in the long run over the course of your loan.
When considering the financing options available to you in a real estate purchase, the most important rule of thumb to keep in mind is to always do the math. Work the numbers and find out which option will benefit you the most over the course of time.
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