The Key Differences Between Residential and Investment Mortgages
When it comes to buying a new home, most people will need to secure a mortgage in order to finance the purchase. However, there is not just one type of mortgage available. In fact, there are two main types: residential and investment mortgages. While both serve a similar purpose of financing a property, there are key differences between the two. In this article, we will dive into the differences between residential and investment mortgages and help you determine which one may be best for your unique situation.
What is a Residential Mortgage?
A residential mortgage is a loan that is used to purchase a primary residence. This type of mortgage is most commonly used by individuals or families looking to buy a house or condominium to live in. Since a primary residence is where the borrower will be living, it typically has a lower interest rate and down payment requirement compared to other types of mortgages.
Interest Rates
As mentioned, residential mortgages typically have lower interest rates compared to investment mortgages. This is because lenders view primary residences as less risky investments. This lower interest rate can save borrowers thousands of dollars over the life of the loan.
Down Payment Requirements
The down payment required for a residential mortgage can range from 3.5% to 20% depending on the borrower’s credit history and the lender’s requirements. If a borrower puts down less than 20%, they may also be required to pay private mortgage insurance (PMI) until they reach that 20% threshold.
Loan Limitations
Another key difference with residential mortgages is that there are loan limitations in place. In 2020, the maximum loan amount for a conventional mortgage is $510,400. This means that if a borrower wants to purchase a home above this amount, they will need to consider other financing options.
What is an Investment Mortgage?
An investment mortgage is a loan used to finance a property that a borrower does not intend to live in. This type of mortgage is most commonly used by investors looking to make a profit by renting out the property or flipping it for a higher price. Since an investment property is viewed as a riskier investment, the interest rates and down payment requirements are typically higher compared to residential mortgages.
Interest Rates
Interest rates for investment mortgages are typically higher than residential mortgages. This is because lenders view these properties as a riskier investment since the borrower will not be living in the property and may have less of a personal attachment to it. This higher interest rate may result in a higher monthly mortgage payment for the borrower.
Down Payment Requirements
Investment mortgages typically have higher down payment requirements compared to residential mortgages. A borrower may be required to put down 20% to 30% or more of the property’s purchase price. This larger down payment helps to offset the higher risk that lenders face with investment properties.
Loan Limitations
Unlike residential mortgages, there are no loan limitations in place for investment mortgages. This means that a borrower can secure financing for a property of any value, as long as they meet the lender’s requirements for down payment and credit history.
Which One is Right for You?
When deciding between a residential mortgage and an investment mortgage, it ultimately depends on your financial goals and personal circumstances. If you are looking to purchase a primary residence, a residential mortgage may be the best option for you. However, if you are looking to make a profit from the property, then an investment mortgage may be the better choice.
It’s important to carefully consider all of the factors, such as interest rates, down payment requirements, and loan limitations, before making a decision. It’s also recommended to consult with a financial advisor or mortgage specialist to determine the best course of action for your specific situation.
Conclusion
In summary, residential and investment mortgages are two different types of loans used for different purposes. Residential mortgages are used to finance primary residences and have lower interest rates, while investment mortgages are used for investment properties and have higher interest rates. Consider your financial goals and personal circumstances before choosing between the two, and always consult with a professional to ensure you make the best decision for your unique situation.
