4 Distinctions You Need To Know Before Borrowing Money To Buy Real Estate

When you’re looking to borrow money for a real estate investment, it’s important to have a thorough understanding of how the money lending process works. Each lender operates …

Real Estate Agent

When you’re looking to borrow money for a real estate investment, it’s important to have a thorough understanding of how the money lending process works. Each lender operates differently, and you need to understand the terms of your specific loan.

Lenders everywhere advertise their services using the words they know you want to hear. They all want your business, but they’re not all a good match for your needs.

Loans aren’t simple. The fees, interest rates, and prepayment penalties make it difficult to understand the true cost of any loan.

Understanding the following distinctions will help you make the right choice so your investment remains an investment:

  1. Even the best advice can be limited

When your friends and family find out you’re looking for a new investment, they’ll have plenty of advice for you. People love giving advice because it gives them a chance to share their wisdom. While friends and family might have some great points, their hard-earned wisdom is only going to be as expansive as the personal experience that earned it. If they’re not an experienced investor, take their advice with a grain of salt.

In other words, their solutions are limited by the method they used to get what they want. Plenty of people get what they want by using inefficient strategies when they don’t know any other way.

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Imagine someone suggesting an adjustable wrench to pull nails out of the wall because they don’t know the back of a hammer is made for removing nails. They’ll be able to pull nails out of the wall, but it’s not going to be as efficient as using the tool designed for pulling out nails.

While personal experience is valid, it’s given too much credit for being an exclusively authoritative source. There are always people who know more, and those people are considered experts for a reason.

Be cautious when accepting financial advice from anyone who only has limited personal experience to draw from. Don’t blindly accept financial advice from friends and family. Unless they’re in the financial industry, your friends and family won’t have the broad range of insight to provide sound financial advice. An experienced broker, on the other hand, does.

  1. A broker doesn’t lend money – they find money

If you’re new to investing and you’ve never borrowed money before, or if you’ve always had your business partners handle financial details, you need to know the difference between a broker and a loan officer.

Brokers don’t lend money. According to professional brokers in Melbourne, brokers “find banks that do [lend money] and then look for the cheapest options available to you as a borrower.”

A broker is on your side, and their job is to help you find the best option for the loan you’re looking for. A broker will help you:

  • Find the cheapest interest rates
  • Refinance your existing loans at a better rate
  • Compare annual percentage rates
  • Look closely at the terms and conditions proposed by lenders

When you borrow money from a bank without going through a broker, you’ll be dealing directly with a loan officer. A loan officer works for the bank and holds the bank’s best interests in mind at all times. They might negotiate with you on interest rates, but they’re always going to keep it as high as possible.

  1. Applying for too many loans at once can hurt you

Most people know that multiple credit checks can look bad to lenders. Too many lenders checking your credit indicates that you might be living on credit, or in serious financial trouble. This is a red flag that can keep you from being approved for a loan you’d otherwise qualify for.

When applying for loans, take it easy and apply for one at a time, starting with your top choice. Wait until you know the status of your outstanding applications to apply for subsequent loans.

  1. Interest rates are different from annual percentage rates

The monthly interest rate advertised by a lender won’t always match the APR. While the monthly interest is calculated based on your outstanding balance, the APR includes every fee and additional cost associated with your loan. That’s why the APR can often be higher than the monthly interest rate. For example, if your interest rate is 3% per month, that equals 36% per year. However, since your APR includes other fees, your actual APR might be higher than 36%.

By law, lenders are required to disclose the APR for every loan. Knowing the APR allows you to compare the cost of one loan with another, provided the loans are the same type.

When analyzing your expenses to determine when you’ll start making a profit, remember to calculate your interest based on your APR for a more accurate number.

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