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Financing your New Condo Investment – Key points to consider

Depending on an individuals condo investment strategies and goals, there will be different considerations that arise when it comes to financing the property.  However, the one issue that always seems to come up no matter what the individual investors situation or proposed property type, is whether one should seek out a fixed or variable rate mortgage.

 

The rationale for using a fixed rate is pretty straightforward. It gives the investor a stable, accurate forecast on mortgage payments over the term of their loan as well as a clear understanding of the impact of those payments on cash flow and ROI. The downside is that the fixed rates are usually higher, and if the bank rates trend downward, there is no way to get out of a fixed rate, in order to benefit from that down trend during the term of the initial financing.

 

Many real estate investors often think of the difference between fixed and variable rates almost as a type of insurance lenders use against the lending rates undetermined potential fluctuations.

 

The rationale for using a variable rate is also straightforward. The rates are lower and there is much more flexibility to move to another financing structure or instrument at any time in the current loan period, should it be warranted.

 

When it comes to choosing variable rates, there are 2 main reasons that investors may be more prone to go this route.

 

  1. More often than not, a variable rate will save a condo investor thousands of dollars. Studies have shown that variable rate mortgages end up costing significantly less than a fixed rate mortgage, over normal mortgage terms, usually 5 years or so. Depending on the price of the initial investment, this can be the difference between single and double-digit return rates on the investment.

 

  1. There is a lot more flexibility with a variable mortgage. If a real estate investor needs to sell a property sooner than they originally thought, the penalties will be much less, or none at all with a variable rate. With a fixed rate, the penalty for an early end to a mortgage can be in the ten’s of thousands.

 

A wise investor needs to be prepared for any and all situations.  The variable rate may be less certain but it will defiantly allow investors to have a great deal of flexibility if a change in financing for the condo investment is ever needed.

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