How To Find a Low Interest Rate Loan for Real Estate

It’s no secret that investing in real estate can be one of the most effective ways to build wealth. One of the reasons for this is the low interest rates that people often qualify for when taking out real estate loans. Whether you want to purchase a new home for you and your family or a rental property to generate passive income, you can take advantage of low interest rate loans that save you money. Here’s more information on how to find a low interest rate loan for real estate investments.

Key Takeaways

• New construction loans provide borrowers with money to put toward construction projects, such as building a new home. They give borrowers a specific amount of time to finish a new build, after which the loan converts to a mortgage or needs to be paid in full.
• Builders can use a forward commitment loan to secure funds before they begin a construction project, allowing them to lock in a lower interest rate and loan terms that benefit you and the contractors who work on the build.
• A commitment loan involves receiving a letter from the lender you plan to work with that verifies their intention to provide funds when the time comes to build or purchase a home. This is beneficial when planning for multiple construction projects or other costs.
• With an assumable loan, you can take over the previous buyer’s mortgage, which can lower the overall cost you’ll pay for fees, home inspections, and loan applications.
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New Construction

If you want to build a new home, you may qualify for a new construction loan that provides funds for construction costs. You can put money from a construction loan toward building materials, land, contractor hiring, and any permits you need to secure before the build starts. Most construction loans only last for around a year, as their term is typically as long as it takes to complete the construction project. Applying for a construction loan involves submitting plans, a budget, and a construction timeline for your project.

You’ll also need to provide some personal details when you apply for a new construction loan. Most lenders require borrowers to have a low debt-to-income ratio to qualify for these loans, as well as a minimum credit score of 680. You’ll also have to make a down payment when you submit your application, which you can turn in with your construction plan. Finally, you’ll likely need a home appraisal before starting, as the lender will use the finished home as collateral for the loan.

There are a few different types of construction loans, so it’s helpful to learn which type may be best for you. For example, a construction-to-permanent loan involves borrowing money to use for the build of a new home and converting that loan into a permanent mortgage once construction is complete. This is often a popular choice, as you’ll only need to pay closing costs once. 

There’s also a construction-only loan, which only covers money for the initial build and is typically due at the loan’s maturity. If you’re looking to make home improvements, you may opt for a renovation loan, which provides funds for renovation projects rather than a full build.

Builder Forward Commitment Loans

A builder can use a forward commitment loan to secure funds before they begin a construction project. This is often an effective way to secure a low interest rate, as builders can lock in the rate and the terms surrounding the loan as soon as they enter the forward commitment. This means that even if you wait several months to start construction on the new property, you’ll get the interest rate your builder initially secured, which protects you from rising interest rates.

When a builder enters a forward commitment with a bank, there are a few details they’ll lock in during their initial negotiations. For example, the builder will verify what type of property they plan to build, the overall price of the build, the schedule for repayments, and the estimated completion date of the property. A builder can also discuss the business operations of the property, such as whether the homeowner plans to use it as a rental home.

Commitment Loans

A commitment loan, or loan commitment, functions in a similar way to a builder forward commitment loan. With these types of loans, you’ll receive a letter from the lender you plan to work with that verifies their intention to provide funds when the time comes to build or purchase a home. This can be a great choice for investors who are planning to purchase or build real estate but don’t want to start immediately, giving them more time for financial planning.

A huge benefit to loan commitments is that you can use the letter you receive to apply for other loans or financial aid. For example, if you take out a commitment loan that you plan to use to build a new home, you can then take the commitment letter to another lender and use it to prove your financial and credit standings. This can allow you to fund other parts of the new build, such as making home improvements, hiring more contractors for custom work, or landscaping.

When you opt for a loan commitment, you can also take advantage of low interest rates that save you money over time. Since you’ll establish the interest rate and repayment plan during the initial loan application, you can secure the best rate for your financial goals. One aspect of a commitment loan that’s important to consider is your ability to pay back the loan in full, as forfeiting on the loan could mean giving up the home you build as collateral.

Assumable Loan

An assumable loan involves the current owner of a property signing over their loan to a new buyer. When doing this, the new buyer takes on the same interest rate, the current balance, and the repayment period that the initial buyer secured when they got the loan. There are many ways in which an assumable loan can help you save money on real estate investments, such as allowing you to take over a loan when some of the balance has already been paid or when the repayment period is more manageable than a brand-new loan.

While they’re highly beneficial to new borrowers, assumable loans are only possible with certain types of mortgages. A conventional mortgage set up through a private lender often doesn’t qualify as assumable. One type of loan that is assumable is an FHA loan, which requires the new buyer to meet FHA loan guidelines, such as the ability to make a down payment of at least 3.5% and a minimum credit score of 580. You can also assume a USDA loan if your credit score is at least 620 and you meet the requirements for income and location.

While you won’t encounter the same opening costs with an assumable mortgage as when you purchase a new home outright, you’ll likely still need to have some cash on hand for closing costs. This is because assuming a mortgage involves paying the seller for the amount of the mortgage they’ve already paid. Although this is included in your total price for purchasing the property, you typically pay this fee immediately, functioning similarly to a down payment.

These are a few of the most common loans with low interest rates. Whether you opt for a new construction loan or an assumable loan, you’ll see great benefits when you invest in real estate. You can use the money you’ll save on interest rates to invest in other assets or improve your property, increasing its value. When you’re ready to take the leap and start building wealth with real estate investments, reach out to Anderson Advisors. Our team of qualified financial professionals will guide you every step of the way.