Perhaps the only way to achieve financial freedom, and live well without waiting for your monthly paychecks, is by learning how to invest.
Now there are a lot of investment options to choose from. However, as Robert Kiyosaki puts it, real estate is the only investment whose value only goes up.
Real estate investing is a form of passive income that provides a hefty amount of revenue stream without requiring you to work by the hour.
However, real estate is not an easy task. You need to do a lot of research, calculate your risk, and dedicate a lot of diligence in order to succeed in this real-life Monopoly game.
In this article, we will talk about investing in income property mortgage.
WHAT IS A MORTGAGE?
A mortgage is a legal agreement between the bank and a homebuyer. The bank gives the lender a conditional right of property ownership. The same property is used as the banks’ security.
In simple terms, a mortgage is a loan that homebuyers get from banks to be able to buy a land or a property.
As this is a huge amount of money that homebuyers are not capable of producing as a lump sum, they borrow from the bank and repay it in installments.
Paying the full amount can take 25 years, but can also be shorter or longer.
The purchased property is only fully owned by the homebuyer once he or she is able to pay the full amount.
Technically, it’s still owned by the bank as it is the one who paid the property in full.
If in case the homebuyer fails to pay these installments within the agreed time, which happens frequently, the bank claims the property.
THE MORTGAGE MAGIC: INFLATION
Investing in mortgages turns a different direction when we talk about mortgages that allow you to earn money.
This is called an income property mortgage.
Renting or leasing a property is one obvious way to earn an income from real estate.
But another way is through price appreciation.
In general terms, price appreciation is the increase in the value of an asset over time.
There are factors in how banks decide whether a lender is qualified to loan for an income property mortgage.
With that aside, there are two opposing facts that make investing in mortgages a little tricky.
One, as we have mentioned earlier, the bank can take the property away from you if you stop paying your loan.
Second, the government is willing to help you have a house. They do this by giving the banks an assurance of your ability to pay your loan.
It creates a chain reaction, a domino if you will, starting from here.
Because governments assure the banks that you are able to pay, banks are racing to get you to buy land.
Apart from the money you already paid, they get an insurance payout from the government, they also get to keep the house. It’s a win situation for them no matter which way you look at it.
With this, you get more fantastic deals as banks compete.
The best deal? An enormous amount of money that the bank is willing to loan you.
How did this mortgage magic happen? Through inflation.
It is a common misconception that the deciding factor of a property or a real estate value is only its current mortgage rate.
The smaller the amount you can make your downpayment, the better your return on investment as a percentage.
A big mortgage will inflate your rental profit and also the profit from home appreciation.
Let’s look at your payment options and the interest deals.
TYPES OF PAYMENT OPTIONS
Your repayment options consider both capital and interest.
In repayment mortgage, you pay both the interest and the capital monthly.
In an interest-only mortgage, your monthly payments are reduced as it only includes the total amount of the interest. You are then required to produce a lump sum for the remaining capital amount by an agreed date.
Some banks allow you to combine these two options where
TYPES OF MORTGAGE INTEREST DEALS
There are also different types of interest deals. These are the two common types.
A fixed-rate mortgage gives you a fixed-term where you pay the same amount monthly for a couple of years regardless of inflation or deflation.
A flexible mortgage gives you some flexibility as it allows you to make overpayments and underpayments. Your rate is also calculated on a daily basis.
It’s important to discuss with your bank on what options are available to you. But the more flexibility they give on payment terms, the better.
WHAT TO CONSIDER
Before buying a property, make sure that you are buying a house that you can afford. Get a mortgage calculator to get an idea of monthly payments.
You need to also know how long will it take you to pay it in full and are you willing to commit to it.
Remember that stretching your payments can decrease your monthly payments but it also means that you are paying more in interest.
PROS AND CONS
To pay in full hard cash or to get a mortgage? That is the question.
The benefit of paying in cash is, of course, owning the house right away. You also don’t need to provide documents as these are just requirements when you’re getting a loan.
The downside of paying in cash though is like having to put all your eggs in one basket.
Maybe just some, but you get the point.
You may not believe it but there’s an upside to debt.
When your mortgage is locked in and you are able to get a low-interest rate, the effects of inflation open up opportunities to earn money.
When buying a property through a mortgage, you only need to cash out a fraction of the property’s price.
It can improve your credit score once other banks see that you are able to pay your mortgage.
Have you made up your mind on investing in mortgages yet?
Investing in real estate is not an easy task but is rewarding in the long run.
Make sure to weigh the pros and cons when buying real estate.