3 Ways to Finance a Rental Property - Mortgage Guys
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3 Ways to finance a rental property

How to finance your property investment

There are many and varied means of financing an investment property, but usually, the question for a buyer is what is the best method of finance for their particular circumstances and which will provide the best return!

How to finance your property investment

  1. Traditional financing

This is a usual method of financing for a property investor, whereby a lender will accept the property you intend on purchasing as security for the loan. By this arrangement, you could benefit from a relatively low monthly financial commitment for the following 15-30 years.  However, the majority of lenders will require a 20%-30% deposit. In many parts of the country, this could involve a significant sum, which often leads would be buyers to search further for their best way to finance a rental property. It is added to by you not being permitted to include “potential” rental income in your Debt-to-Income (DTI) assessment.  

  1. Home Equity Loan (HELOC)

Another popular way to finance a rental property is the Home Equity Line of Credit type of financing. It becomes available in the event of a lender using an existing property, owned by you as security for a new loan.  The facility functions similarly to a credit card, whereby the lender will provide you with a line amount, from which you can charge or borrow required funds. There is a monthly billing and a minimum payment, which is generally related to principal sum and interest. Whilst the lender will give you all of the funds upfront, you are required to make a determined payment every month. A “HELOC” or Home Equity Loan could be regarded as a streamlined version of a conventional mortgage.

  1. Cash-Out Refinance

This loan facility is also recognized as another best way to finance a rental property and is used when an existing property is used by a lender as loan security. The application procedure is the same as that for a regular mortgage and accordingly takes between 30-45 days to complete.  Usually, funds are available to the value of up to 80% of your related home value, without issue. The cash-out refinance loan option discharges any existing debt on the property, thereafter creating a new mortgage, and providing you with the difference as a “cash-out”.

This type of lending facility, although seen by many as the best way to finance a rental property is subject to you personally being comfortable in utilizing the equity from an investment property you already own. Should the home not have been purchased within 6 months prior to the new loan application, the maximum cash-out is 75% LTV for a 1 unit property and 70% for a 2-4 unit property.