Rental Property Mortgage

If you are buying a residential or commercial property for investment purpose or for renting it out, the loan you take for buying that property would be called rental property mortgage. This loan would be different from your usual home loan in the sense that you won't be staying in that property but would be using it for renting it out to other people and earn rental income from it.

Interest on rental property mortgages is generally higher because the lenders are apprehensive about the regular payment of the installments since they believe that their client may miss his payments as he is not personally residing in that property.

It is advisable to check with three to four lenders be it mortgage companies, banks or credit unions about all the details regarding interest rates, their policies, fees, facilities, terms and conditions and closing costs of all the lenders to get a clear picture of what every lender will/will not provide.

Like the real estate mortgage rates, rental property mortgage rates are either fixed mortgage rate or variable mortgage rate. While fixed mortgage rates remain the same throughout the term, variable mortgage rates increases or decreases throughout the loan period, depending on various factors like inflation etc.

Variable mortgage rates are usually low as compared to the fixed mortgage rates as fixed rates are not influenced by fluctuation in the economy. Other alternatives like a combination of both fixed and variable mortgage rates are also available in the market. Buyers can opt for fixed mortgage rate for a couple of years and later shift to variable mortgage rates or vice a versa.

Tips to keep in mind while going for rental property mortgage:

• Since you are buying the property for investment purpose, you must take into consideration profit, loss and possible risks involved. Before buying the property, you must be sure about the rental income your property is going to fetch and how much profit will you earn after deducting the mortgage payments and related expenses.

  Also take into consideration the appreciation value of the property you intend to buy as higher the appreciation value, higher would be your rental income.

• You should conduct a detailed study about the area in which you are planning to purchase the property. Property which has schools, colleges, hospitals and markets in the vicinity are most sought after. Make sure that demand of flats or apartments is more than the supply in area where you are planning to invest as it will be easier for you to find tenants for your property and that too at the price you quote.
• If you want to save tax on the property you are buying for rental purposes, it is advisable that you personally stay in it or use it for at least 14 days in a year. If you don't do so, you will not get tax exemption as you can get the tax benefit if you are paying mortgage interest on a second home, but you won't get the same if you are buying property for investment purposes.

However, if you show it as an investment property, you can deduct expenditure borne on maintenance and advertising if that exceeds the rental income you are generating as well as loss incurred if you sell the home.