When buying a new property in Maryland’s competitive market, mortgage borrowers should know the differences between mortgage types before signing their agreements. Maryland mortgage lenders explain that differences between investment and traditional mortgages can profoundly impact the flexibility of the homeowner’s repayments and the financing opportunities on their investment properties.
Suppose you’re a Maryland resident applying for a mortgage. In that case, you need professional advice on the nuances of the available loan types to make the best decision for your situation. Consider this guide on the differences between investment and traditional mortgages to choose the most advantageous repayment strategy for your new property loan.
What is an Investment Property?
An investment property is a property purchased with the intent of generating revenue. Examples of investment properties include rental properties, offices, warehouses, retail centers, and more. Mortgages on investment properties differ from those taken out on traditional residences due to their ability to generate revenue, which comes with its own risks, tax implications, and legal restrictions.
Homebuyers should be aware of gray areas in the definition of an investment property. For example, second homes may be rented for part of the year and used as the primary residence for the other part. In that case, which type of mortgage would the homeowner need? The answer depends on how the property is used and for how long.
Legally speaking, a rental property cannot be used as a personal residence for more than 14 days or more than 10% of the number of days it is rented out (whichever is greater). Additionally, rental days only count if a “fair rental price” is offered, meaning the rule cannot be circumvented by renting to friends or relatives at a fraction of its rental value. These would count as days of personal use rather than rental use.
These gray areas are why new homebuyers should seek professional advice on which mortgage type makes sense.
How Do Investment Mortgages Work?
If the property can be legally designated as an investment property rather than a second home, the homeowner can take out an investment loan. These loans typically come with higher interest rates and more specific lending criteria than traditional mortgages.
This criterion includes a higher down payment than traditional loans, which, for investment mortgages, is often 30% of the home value or even more. The minimum credit score, asset value, and monthly income requirements also tend to be higher for investment loans.
Additionally, unlike traditional mortgage borrowers, homeowners who choose an investment mortgage must prove to the lender that their property’s revenue will cover their repayment costs.
Benefits of Investment Mortgages
With stricter qualifications and higher interest rates, Maryland homeowners may wonder whether an investment mortgage is advantageous over a traditional home loan. The benefits of investment mortgages include:
- Tax Benefits: Tax deductions and profit strategies are available for the owners of investment properties. For example, a 1031 Exchange, which the IRS labels as Form 8824, allows the owners of investment properties to exchange them for similar properties, making a profit while deferring capital gains taxes on the sale.
- Reliable Income: While traditional home loans rely on household income for loan qualification, investment properties generate revenue, potentially making it easier for homeowners to repay the loan.
- Personal Use: If used within the guidelines established above for how often rental properties can be used recreationally, homeowners can potentially get the tax benefits of owning an investment property while still spending time at their property for personal use.
- Market Resistance: While traditional adjustable-rate mortgages fluctuate with market performance, investment property values and rental values increase proportionally to the market, potentially offering homeowners a buffer against inflation.
- Value Appreciation: As the real estate’s value increases, investment properties can accrue value in a more advantageous way than traditional properties due to capital gains profits in the event of a sale or value appreciation due to property improvements.
These benefits share one thing in common: the need for homebuyers to remain diligent about their means and expectations when considering investment mortgages over traditional home loans. A firm experienced in helping Maryland homebuyers choose the right mortgage for their situation can determine whether an investment mortgage would be beneficial or even applicable to your prospective purchase or whether a conventional mortgage loan would make more sense.
Consult a Professional to Apply for the Best Mortgage for Your Situation
Maryland homeowners face long-term uncertainties in a changing housing market when choosing the mortgage type for their new properties. Distinguishing between investment and traditional mortgages is essential for new homeowners to create the most advantageous loan repayment plan and remain within the letter of the tax laws in Maryland.
Contact our professional team at Woodsboro Bank to learn how we help Maryland homeowners choose suitable mortgages for their situation.