The mortgage maze

There are many different kinds of loans offered by banks, mortgage brokers, mortgage originators, insurance companies, hard money lenders, mezzanine finance brokers and so forth.

Furthermore while the typical mortgage on a house is a 30-year principal and interest (P&I) mortgage, there are many variations, derivatives, and alternatives. You might get an interest only loan (where you only pay interest and repay the entire principal amount at the end of the loan) or you may get a ten year loan amortized as if it were a 30 year loan.

The type of loan that will suit you best will depend on your cash flow constraints (determined by your income and that from the property), your credit worthiness, your ability to convince someone to lend you money and by no means least the desirability of the property being bought. There is no one-size-that-fits-all, so do your research and determine which mortgage suits you best.

Get loan pre-approval

When submitting an offer to buy a property, many buyers make the offer subject to finance, meaning that the purchaser needs to obtain mortgage funding before they can proceed with the purchase.

A purchaser who can make a cash offer is in a powerful position and will often see his offer accepted even if the price offered is lower than an offer subject to finance. Not everyone has the full purchase price in cash in the bank. However there is something you can do which is almost as good as cash in the bank, and that is to arrange for pre-approval for a loan. The bank will look at your income and other circumstances and pre-approve you up to a certain limit, for instance $200,000. If you additionally have $50,000 cash you can now make an offer on a property up to $250,000 that is no longer subject to finance. To the seller, a buyer with a loan pre-approved is the same as the cash buyer.

Talk to your mortgage broker about getting pre-approved so that you can begin searching and evaluating properties in Step 5 of Landlord University.

Pay off your investment mortgage or keep it?

Many people think that the smartest thing to do with any investment property is to pay down the mortgage. To be sure, there are many advantages of doing so. The biggest advantage is probably peace of mind. However there are many compelling arguments not to pay off the mortgage on an investment property. Instead of using tax-paid capital to pay down a mortgage, it may well be smarter to use that same capital as the deposit on your next investment property. Keeping mortgage debt high keeps interest payments high and therefore tax deductibility high, meaning the internal rate of return will be better. Furthermore if you were to pay down your mortgages you may be more vulnerable to law suits, frivolous or otherwise.

Why you SHOULD pay off your home mortgage

Unlike investment properties, when it comes to an owner-occupied dwelling - the house you live in - there is a strong case for paying down the mortgage as fast as possible.

First, a small or no mortgage on your own home can give (once again) peace of mind. Second, interest paid on your home is not tax-deductible, whereas interest on investment property is, so paying down an owner-occupied home fast makes good tax sense. Third, as the mortgage gets paid down, you have equity that you can tap into for other investment purposes - and the interest on this will always be tax-deductible.