Your Borrowing Strategy in Real Estate Investing

Foreclosure investing periodic borrowing: you need a well-established plan to apply time and time again!

Plan your borrowing strategy before contacting your bank or financial institution

Funny Thing in Finance: Lenders like to give money to those who don’t need it. You don’t simply get it if you desperately need it. Moral of the story: Arrange financing when you don’t need it. You look like a person with long-term plans!

Fixed-rate loan versus adjustable-rate mortgage loan

Fixed–rate loans carry higher interest rates but give you peace of mind. You pay the same fixed amount in monthly mortgage payments during the term of loan. Plan your borrowing strategy before taking any action in obtaining financing your foreclosure property purchase.

Adjustable-rate mortgage loans (ARMs) carry lower interest rates. They are indexed to prime rate, LIBOR (London Interbank Offer Rate), Treasury Bill rate, or any other well-known rate with a margin. It may be prime plus a percentage point. Accordingly, this percentage may go up or down. In general, the starting interest rate is lower (teaser), going up by no more than annual caps. There is another cap for the term of the loan.

Important considerations in getting adjustable rate mortgage loan for your home purchase

Before committing yourself, make sure that:

  • Your ARM is indexed to a stable and well-known interest rate.
  • There is no pre-payment penalty.
  • Annual and lifetime caps are within industry standards.

Need more funds for foreclosure home financing?

There are three ways that you can increase the amount of funds that you can get:

  • Apply for an Adjustable Rate Mortgage (ARM) if your fixed-rate loan amount is insufficient to cover the selling price and expenses. Due to its lower interest rate, at least in the beginning, you can qualify for a higher amount of loan money.
  • Get Private Mortgage Insurance (PMI). This insurance enables you to lower your down payment to 3 percent, thus increasing the amount that you can use to purchase the fixer-upper or foreclosure home that you want. This insurance gives your lender an assurance that the difference between your actual down
  • payment and 20 percent of the loan is covered.
  • Ask for a balloon mortgage loan. You pay very low installments in the beginning.

Cancel your Private Mortgage Insurance on time

Ask for cancellation of PMI when your equity in the foreclosure property reaches 20 percent when you use it as your residence or lease it. You don’t have to wait until your installments make up the 20 percent. Check the market value of your home. If your equity exceeds 20 percent when your property is valued at market prices, look for refinancing. Many people forget this and pay their insurance premiums unnecessarily.

Here is an example: You purchase a home with a 3 percent down payment by obtaining PMI. Your home’s market value increases by 18 percent in one year. Now, your equity is 21 percent. When you apply for the same amount of loan (not for the full value), then, you have more than 20 percent equity in your house. Borrowing 80 percent of the value will suffice to pay off your current loan and replace it with a refinanced loan.

See your other borrowing options…