As we all know, nothing is free in this world. The same holds true for obtaining a loan. If you plan to buy investment property in the near future, you’ll most likely need to use credit to acquire financing of some sort or another. In most cases, the average investor will get a traditional loan. Sometimes nontraditional loans are also possible as well.
As you can imagine, different scenarios will dictate whether or not you pay certain costs and hidden costs for acquiring a loan. To help you better understand the additional fees involved in obtaining a loan, we’ll share the fees and ill-fated hidden costs that many people purchasing property typically pay.
Hidden Cost: The Low Credit Score Interest Penalty
No one is ever going to describe this as a penalty, but that’s exactly what happens nonetheless. If you attempt to get a loan and you have a low credit score, you’ll end up paying a much higher interest rate when acquiring a loan. This is what creditors base their lending practices on, so if your credit score is in on the low end of the spectrum you can expect to pay higher interest rates.
Do you need to obtain a loan now? If so you’ll have no choice but to apply for one with your current credit score. On the other hand, if you have additional time you can take steps to raise your credit score to get better interest rates.
Everyone has a different financial picture. If it makes sense to apply for loans with a low credit score, you should absolutely go for it. Otherwise, you should attempt to raise your score before applying for a new loan.
Hidden Cost: Total Ownership Cost
Next, we’ll focus on the total ownership cost and the expenses that it will generate when taking out a loan. We’ll determine total ownership costs based on an example loan.
Let’s say you plan to purchase a home for $150,000. You intend to put 10% down, so the total loan comes to $135,000. So you’ll have to pay a monthly payment to cover the $135,000 owed over 30 years. Obviously you’ll end up paying heavy interest in the beginning and more principal toward the end.
Besides the interest, there are other total ownership costs that you’ll have to pay for as well as a homeowner. Think about buying furniture, fixing up the property, lawn care, water bills, electricity, PMI insurance, homeowners insurance, taxes, and a plethora of other expenses that come with home ownership.
If you didn’t factor any of these things into the total ownership cost, you’re in for a serious surprise once you start paying your bills. So keep total ownership in mind when applying for a loan and factor it into your thinking.
Loan Cost: Acquisition Fees
Last but not least, every loan is going to have fees involved. Mainly, you can expect to pay a loan origination fee. This covers notary fees, document preparation fees, loan preparation fees, and more. Overall, this fee is usually 0.5% of the total amount borrowed so if you take out the $135,000 mortgage, your loan origination fee will cost $675.
Clearly, there are obvious hidden and regular costs to acquiring a loan. Please keep them in mind the next time you apply to borrow money from a creditor.