I would like to start getting into investment property in the future but
for now I am absorbing as much information through reading books. I just
finished reading the “ABCs of Real Estate Investing” and I am waiting for “Buy
It, Rent It, Profit!” to come in the mail. The cost of buying an investment
property varies depending on many factors. I am an absolute beginner to real
estate investing but I recently developed 3 tables for what the expenses could
look like for a $125,000 home in my area, assuming a 4% interest rate.
Here are the examples of the mortgage programs available to me.
|
FHA Loan
| |
|
Expenses
|
Estimated Cost
|
|
Down Payment (3.5%)
|
$4,375
|
|
Closing Costs (3%)
|
$3,750
|
|
Emergency Fund (6 months of Expenses)
|
$8,100
|
|
Property Tax (Based on a home I looked at)
|
$2,578
|
|
Maintenance (2%)
|
$2,500
|
|
Appliances/Furnishings (Dish Washer, Oven, Microwave, Couches,
etc.)
|
$1,750
|
|
6 Months of Mortgage (In case of emergency)
|
$4,236
|
|
Home Inspection (Estimate)
|
$200
|
|
Home Appraisal (Estimate)
|
$375
|
|
Attorney (Estimate)
|
$600
|
|
Total
|
$28,464
|
|
Mortgage
|
$706
|
The FHA is one of the more popular choices among first time homebuyers.
It has been a great choice for those who do not have a ton of money saved since
you don’t have to have a large down payment.
Advantages
- You only need a credit score of 580 in order to qualify
- You can qualify with a low down payment of 3.5% of the home price
- The interest rates compare to those of a conventional loan
- The down payment can be gifted from a family member or friend
- You may also borrow against your 401k for a down payment
- No prepayment penalties
Disadvantages
- You have to pay Private Mortgage Insurance on your home
- Private Mortgage Insurance is harder to cancel
- PMI fee is usually higher than compared to a conventional loan
- Some properties aren’t approved for FHA loan financing
- Little to no instant equity
- Higher monthly mortgage payments
- Less positive cash flow or ROI (Return on Investment)
|
10% Down Payment Conventional Loan
| |
|
Expenses
|
Estimated Cost
|
|
Down Payment (10%)
|
$12,500
|
|
Closing Costs (3%)
|
$3,750
|
|
Emergency Fund (6 months
of Expenses)
|
$7,860
|
|
Property Tax (Based
on a home I looked at)
|
$2,578
|
|
Maintenance (2%)
|
$2,500
|
|
Appliances/Furnishings
(Dish Washer, Oven, Microwave, Couches, etc.)
|
$1,750
|
|
6 Months of Mortgage
(In case of emergency)
|
$4,002
|
|
Home Inspection (Estimate)
|
$200
|
|
Home Appraisal
(Estimate)
|
$375
|
|
Attorney (Estimate)
|
$600
|
|
Total
|
$36,115
|
|
Mortgage
|
$667
|
This conventional loan is great for a homebuyer who has some cash on
hand but doesn’t want to empty his savings account. A conventional loan adheres
to the guidelines set by Freddie Mac and Fannie Mae. The federal government
does not insure these types of loans.
Advantages
- You will receive a competitive fixed interest Rate
- The Private Mortgage Insurance fee is much less
- Closing costs on your home our lower when compared to an FHA loan
- You can cancel PMI once your Loan to Value reaches 80%
- This type of loan can be used on all property
- You can hold numerous conventional loans at a time
- Nearly every bank offers Conventional loans so your options are open
- Higher equity unless your house is worth less than you paid for it
Disadvantages
- You are forced to pay Private Mortgage Insurance
- You need a credit score of 680 or higher to qualify
- More difficult to qualify than the FHA Mortgage program
- There could be a prepayment penalty
- Higher down payment
|
20% Down Payment Conventional
Loan
| |
|
Expenses
|
Estimated Cost
|
|
Down Payment (20%)
|
$25,000
|
|
Closing Costs (3%)
|
$3,750
|
|
Emergency Fund (6 months of Expenses)
|
$7,500
|
|
Property Tax (Based on a home I looked at)
|
$2,578
|
|
Maintenance (2%)
|
$2,500
|
|
Appliances/Furnishings (Dish Washer, Oven, Microwave, Couches,
etc.)
|
$1,750
|
|
6 Months of Mortgage (In case of emergency)
|
$3,642
|
|
Home Inspection (Estimate)
|
$200
|
|
Home Appraisal (Estimate)
|
$375
|
|
Attorney (Estimate)
|
$600
|
|
Total
|
$45,395
|
|
Mortgage
|
$607
|
This program is very similar to the 10% Down Payment mortgage. This used
to be the required down payment a long time ago, but these days a 20% down
payment is avoidable. The same pros I mentioned for the 10% down payment type
of loan also apply to this type of mortgage program. You also get a whole new
list of advantages.
Advantages
- You immediately start with a good amount of equity with 20% down
- The closing costs are much lower and may be waived by seller
- You are no longer require to pay a Private Mortgage Insurance
- Lower monthly mortgage payments
- You will receive the best-fixed interest rate
- Smaller mortgage makes it possible to get a 15-year mortgage with lower interest rate
- You get a better return rate and positive cash flow on your investment property
Disadvantages
A large down payment is hard to come up with
How do you feel about these mortgage programs? Would you add any advantages or disadvantages to any one of these loans?
