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The Basics on Rental Property Loans

By Ruth Racey
Published: Sunday, December 6th, 2009

Dealing with loans for rental property is no piece of cake. If you are considering taking out a loan for a rental property as start-up for that business of yours, then you need to remember several important facts. Remember that the key to a successful business is to know what you are getting into so that you can maximize every investment you make. And one huge advantage to knowing what you are getting into is having the ability to enjoy the best bargains you can get as a landlord for all your mortgage payments.

Just how do these loans for rental properties work? Such loans can also be referred to as landlord loans or buy to let loans. As a prospective landlord – that is, unless you are incredibly rich to begin with – this is the kind of loan that you should definitely be knowledgeable about. After all, making your mortgage payments will take you several years so you should test the waters before jumping into it.

Your local bank is not the only place you can turn to for rental property loans. In fact, you can also try local finance companies – these have even become as popular as banks when it comes to taking out rental property loans. Oftentimes, the rental property’s developer would offer you an affordable loan package and, in turn, they would then become your lender.

For the most part, banks and finance companies feel confident enough to cover more than half the cost of your rental property for you – even if you are still a beginner in the trade. This coverage can even go as high as 90%, depending on how the lending institutions view you as a borrower. But as any loan application, this offer would vary on several factors, such as credit history, income, status, debts you owed and presently, owe, your age, as well as the policies of the lending institutions themselves.

In general, rental properties are considered long-term investments so you can expect to be paying for your loan from a period stretch of 10 to even 30 years. If you are younger and your source of income is quite stable already, then your lender might give you a longer period to repay your debt. Longer loan periods lead to lower monthly mortgage payments. However, this would also lead to higher interest payments on your end.

More importantly, you should also know the difference between fixed rate mortgage and adjustable rate mortgage.

As indicated by its name, a fixed rate mortgage would require you to pay a fixed interest rate throughout the loan period. An adjustable rate mortgage, on the other hand, offers flexible interest rates that are dependent on the current interest rates of the market. Both of these options have their own pros and cons so be sure to determine which one works best for you.

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