Taking out a mortgage is a big step in many people's lives. For first-time homebuyers, this can be an especially pivotal moment, as taking out a mortgage requires a lot of time and thought. Choosing the kind of mortgage you wish to take out can seem daunting, especially if you aren't educated on the different types of mortgage options available to you.
A private mortgage is a loan provided by a private individual or business as opposed to a traditional mortgage lender. Many people choose to take out a private mortgage for several different reasons, but the choice is ultimately up to the individual. If you're considering taking out a private mortgage, here are a few pros and cons to help make your decision easier.
Pro: Higher Chance of Being Approved
A problem that many people run into when applying for a mortgage is not being able to get approved. Traditional lenders typically have stricter requirements, and many people with unique financial situations may not qualify for a mortgage through these kinds of companies. A private lender is more likely to take on borrowers with less than perfect credit or unique situations, such as being self-employed. If you are worried that you won't be approved for a mortgage through a traditional lender, a private mortgage may be the best decision for you.
Con: Shorter Payback Time
The good thing about traditional mortgages is that you will typically have longer to pay back the loan, whereas private mortgages will have shorter payback periods. This could mean you will be expected to pay back your loan from anywhere between six months to two years, a much shorter timespan than a traditional mortgage. If you are not prepared to pay back the loan in a short amount of time, a private mortgage may not be for you.
Pro: Great for Fixer-Uppers
Home flipping is all the rage these days, with more and more people purchasing properties that could use a little TLC and flipping them into the homes of their dreams. If you're thinking about purchasing a fixer-upper, a private mortgage could be perfect for you. This is because homes that need an extensive amount of repairs typically will not qualify for traditional mortgages, even if the borrower's credit is good. A private lender is more likely to take on a borrower planning to fix up an old home, making it worthwhile to look into this type of loan.
Con: High Interest Rates
One of the biggest downsides to taking out a private mortgage is that these types of loans typically have higher interest rates. In fact, private mortgage interest rates can often be double that of a traditional mortgage, seeing as these loans are typically easier to get approved for if you have less-than-perfect credit. All of this is important to keep in mind if you think you will ever want to move out or sell your notes, as the type of mortgage you choose can impact all of these factors.
