Are you looking to invest in a new home?
This year, the number of houses available on the real estate market in the US has increased. This is good news for homebuyers, considering how tight the housing market has been in 2020.
If you plan to buy a house, you will likely be paying for it through a mortgage. Knowing the type of mortgage you need is basic knowledge for any homebuyer. Here is a brief comparison between an investment property mortgage and a second home mortgage.
How Mortgages Work
A mortgage is a type of loan used especially for buying a home. These are necessary if you cannot pay for a home upfront.
What makes a mortgage different from other types of loans? In a mortgage, the property bought by the borrower is the collateral. If the borrower is unable to continue with the payment, the lender can repossess the property.
What’s the difference between an investment property mortgage and a second home mortgage? Before we get into that, we should differentiate a second home from an investment property. It all lies in what you plan on using the property for.
If you are to buy property on top of your primary residence, that will be a second home. People often buy these to live in for part of the year, whether for work or vacation purposes. You can turn a second home into your primary residence, but you can’t list a property as both.
An investment property is set apart by your purpose for buying it. If you are buying property to generate income, that would be an investment property. It counts whether you are buying property to rent out, turn commercial, or even flip.
There are some conditions that make an investment property. First, it is not occupied by the owner and they use it for generating income. Second, the owner rents it out for more than 180 days a year.
Even if the owner is a resident, if it meets the second condition, it may still be an investment property. Property investors will often compute for the return of investment before going for an investment property.
Investment Property Mortgage vs. Second Home Mortgage
Lenders will be stricter about the credit requirements for second homes than for primary residences. They will be even more so with investment properties. Mortgage rates are also higher with investment property.
You may be deciding whether you should buy something as an investment property or a second home. Investment property mortgages are generally higher than second home mortgages. Even so, consider that investment properties have a high ROI.
The heaviest part of mortgages is the down-payment. What about getting a property mortgage with only 10% down? Check it out here!
The Importance of this Distinction for Homebuyers
When buying property, it is vital to establish what its purpose will be. A property for generating income will need an investment property mortgage.
Even with a mortgage, the cost of buying an investment property is higher than a second home. This comes with the freedom to use it for generating income.
Do you plan on being a property investor? Check out our other blog posts to learn more about investment properties!