For people seeking an investment property loan particularly from an institutional lender, it’s essential to understand that there are various variables relevant to the loan terms. Therefore, having appropriate knowledge about these terms can prove to be highly beneficial when considering an investment loan.
What’s an interest rate?
Interest rate is one of the most significant factors, when it comes to looking for an investment property loan. It’s actually the worth of borrowing money and has a direct effect on monthly payments. Determining the amount you have to pay for a property, the interest rate is likely to influence the cash flow as well.
What about loan amortization?
Normally, a loan is either prepared for simple interest or amortized. As far as a simple interest loan is concerned, by multiplying the balance of the loan with the interest rate, the amount can be evaluated. Let’s suppose, there’s a $100,000 loan at 12% interest, then the amount would be $1,000.00 on a monthly basis. Of course, the payments stand for interest-only, thus the actual amount of the loan bears no change.
Now, an amortized loan is somewhat more complicated. The technique involves breaking down payments over a number of years and the payment remains unchanged every month. In the case of loan amortization, if extra payments are made, the amount of owed principal further decreases.
Balloon mortgage and ARM
A mortgage having a fixed interest rate for a set period of time is known as a balloon mortgage. This fixed period of time is generally five to seven years long. And during this time frame, your mortgage payments will be determined by a fixed interest rate and you will know the exact amount, needed to be paid on a monthly basis.
Nowadays, several lenders are coming up with “variable-rate financing” because of the unpredictable interest rates in the future. This idea of variable-rate financing employs adjustable rate mortgage, more commonly known as an “ARM” loan. This way, the lender’s intentions of profit and the borrower’s requirements accompany several deviations. Mainly, ARM loans come with two limits (“caps”) governing the increase in the rate. One cap maintains the limit on rate of interest raised over the life of the loan; the other controls the amount at which the rate of interest can be increased. In case, the primary rate is say, 6 percent, it may have a lifetime cap of 11percent and a one-time cap of 2 percent. The changes are made on a monthly basis, every six months, once a year or a couple of years, depending upon the “index” the ARM loans are based.
