Estate financing investing real
Traditionally, investments in real estate are considered to be the best investments. The main reasons for this are:
- Real estate appreciates over a period of time, unlike investment in government securities or bank deposits, which stagnate, and eventually lose value due to inflation. Therefore, real estate investment moves at par with inflation, if not overcoming it.
- Real estate investment cannot be robbed unlike gold and other valuables
- Apart from capital appreciation, real estate investments fetch some nominal return, be it rentals, or agricultural income, or lease incomes, etc. These incomes increase with time, and are therefore essential to mitigate the impact of inflation. This is the reason that people invest in real estate, even though the comparative returns in immediate future seem negligible.
- Home loans are a type of real estate loans. This type of loan facilitates purchase of a home by borrowing substantial amount from the lender, at much lower interest rates than those prevailing in the market. In addition, this loan is repayable over a long tenure, generally in equated monthly installments. The interest component in these loans is allowable as deduction against the income of that year in income tax. In some countries, even the principal component that is repaid on these home loans is allowable as deduction from income.
- Home loans, effectively allow borrower to buy an asset that appreciates continuously, from the funds of the lender. If the installment paid on the home loan is discounted based on inflation rates, the quantum of interest paid by the borrower to the lender is virtually nil.
- Properties such as homes may be re-mortgaged and home equity loans may be taken on them against appreciated values to meet any exigencies
- Unlike shares, and gold, real estate properties are considered worthwhile properties by lenders to extend any type of loans.
- If and when the borrower is left with fairly substantial funds, there is a possibility of adding one more floor to the house. Such addition may fetch him or her additional rental incomes, which increase with time.
Even though investments in real estate rank above other forms of investments, purchasing real estate is not very easy. This is primarily because the prices of real estate are extremely high. Even if the investor wanted to, he would not manage to save adequately for purchasing such properties out of savings. By the time the real estate investor saved adequately, the prices of the desired property would have shot up again. This is the reason taking a loan and buying real estate is advisable, rather than saving for buying such properties.
Banks, private lenders, financial institutions, and credit unions etc. have come up with finance products that suit the borrowers pockets. By spreading the loans over longer periods, and devising an affordable monthly installment that is made of interest and principal, the purpose of both the lenders and the borrowers were served.
Some lenders are more enterprising than others. These lenders offer additional financing features such as ballooning of the loan, and moratoriums on the loans, or interest only loans, etc.
Ballooning of loans is offered in cases where the borrower expects to receive some funds from reliable sources such maturity of some deposit or government security. In such cases, borrower is allowed to borrow more than he or she is eligible as per the income levels, with a condition that as and when the anticipated amounts are received, they will be used to clear part of the loan.
Moratoriums are offered on interests and principal. A period of two years or three years is the maximum moratorium that the lender may find acceptable. The interest that is not collected during this period is added to the principal after this moratorium period, and recovered over the balance period. Obviously the installment is higher than similar loans being repaid with immediate effect.
Interest only loans enable the borrower to pay only interest throughout the loan tenure at an agreed rate. And at the end of the term, the borrower becomes liable to pay up the loan principal.
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