The whole thing can be pretty confusing. Fixed rate, adjustable rate, conventional mortgage, hard money loan, interest, and principal – all those financial terms don’t make things any easier either. But whether you’re buying real estate to live in or for investment purposes, you need to know your options and exactly what you’re getting into when it comes to borrowing large amounts of money. So here’s what you need to know when it comes to exploring your loan options for Los Angeles real estate.
Overview of Loan Options for Los Angeles Real Estate
The three main aspects of any real estate loan are the type of loan, the rate, and the term. Heres what we mean.
TYPE OF LOAN
The factors that determine the type of loan are the investors involved (government or private), qualifying requirements and down payment, and usually the amount of the loan. For example:
- FHA loan – Typically the easiest to qualify for, an FHA loan requires a lower down payment and lower credit score than a more conventional loan. But over the long haul, an FHA can wind up costing more because you have to pay for mortgage insurance.
- Conventional loan – This is what most people think of when it comes to mortgage loans. These are often more difficult to qualify for than FHA loans, and require a larger down payment, often up to 20%. But with a conventional loan, you often don’t have to pay for private mortgage insurance.
- VA loan – A VA loan, as the name suggests, is for veterans, eligible surviving spouses, and active duty service members. With a VA loan, you may not have to come up with a down payment or pay for mortgage insurance.
- Jumbo loan – “Jumbo loans,” according to a top loan source, “are mortgages that exceed the conventional loan limit. This simply means that you’ll need a jumbo mortgage if your loan amount is between $484,351 and $3 million.”
Your loan options for Los Angeles real estate are also determined in large part by the kind of mortgage rate, primarily either fixed rate or an adjustable rate. Which one you choose will be determined by your financial situation and your home ownership goals.
With a fixed rate mortgage, the interest rate will remain the same throughout the entire life of the loan. This is one of the better loan options for people who intend to live in the home for many years and who need a fixed payment amount every month. With an adjustable rate mortgage, on the other hand, the rate stays the same only for the first few years and then typically increases from year to year depending on market conditions. An adjustable rate mortgage is a good option for people who intend to live in a home for only a handful of years.
The term is simply the life of the loan, how many years it will take to pay it off. Fixed rate mortgages are usually for 15 or 30 years, and the typical adjustable rate mortgage is for 30 years. Longer term loans keep your monthly payments lower, but you pay more in interest over the life of the loan. The benefits of a shorter-term loan are that you will pay it off quicker, and you’ll pay less in interest (though monthly payments will be higher).
Loan Options for Los Angeles Real Estate
Loan options for residential home buyers are really pretty straightforward, but things do get a little more complicated for investors. So let’s take a look at loan options for investors.
This is the most common kind of mortgage loan among both residential buyers and investors. It is, as top financial adviser puts it, “simply a loan that private entities like banks or mortgage brokers offer for real estate investment purposes. It conforms to guidelines set by Fannie Mae or Freddie Mac and it’s not backed by the federal government. “Typically, a conventional loan for investment purposes requires a down payment of 20% of the purchase price and a minimum credit score of 620.
HARD MONEY LOAN
This is a loan that an investor gets from individual professional investors/speculators from companies that lend money for real estate investing purposes.”The best thing about these types of loans,” according to investment experts, “is that they are faster to secure than conventional loans. Moreover, hard money lenders don’t look at the real estate investor’s credit score – instead, they evaluate the value of the income property you’re planning on buying to decide whether or not to grant you the loan.” The downside is that you will have a mountain of formalities and paperwork to wade, the loan is short term, and the interest rate is usually pretty high.
PRIVATE MONEY LOAN
As the name says, this is one of the loan options for Los Angeles real estate that does not involve a professional lender, but rather private individuals seeking to get a good return on investment, very often friends or family. People who opt for a private money loan have often been turned down by a bank and are seeking a loan that has less stringent qualifying requirements and with more wiggle room in the terms.
HOME EQUITY LOAN
A home equity loan is an excellent choice among the various loan options for people who have considerable equity in their current home and are seeking to finance an income-producing property. Financial and investing experts explain that home equity loans for investment allow “homeowners to borrow against the equity of their home to use towards buying a second home or an income property. The loan is based on the difference between the homeowner’s equity and the property’s current market value. In most cases, it’s possible for a real estate investor to borrow up to 80% of the home’s equity value!”
Don’t Forget Your Local Agent
There are, then, various and widely varying loan options for Los Angeles real estate. But how do you determine which one is right for you? Maybe you should call on the experience and knowledge of your local real estate agent, someone who knows the local market inside and out, for a little guidance.