There’s more than one type of residence on the block.
Typically, when applying for a mortgage, the question of what type of residency you’re purchasing arises. Two of those options will be primary residence and investment property. Knowing the difference between these two options is crucial when considering mortgage rates, loans and more.
What do each of those choices mean? Here’s how to tell them apart and better understand how the question of primary residence vs. investment property affects you.
Primary Residence vs. Investment Property: What’s the Difference?
The major difference between these two types of property lies in how you intend to use the property you’re buying. A primary residence is typically your long-term home. It’s where you live, sleep, raise you family and watch TV. An investment property might be fully capable of serving as a home, but it’s instead used as a means of generating income.
That’s the key difference, but knowing how that difference affects the buying process requires diving into the details.
What is a Primary Residence?
A primary residence, as mentioned above, is property that you (and, where applicable, other occupants) are actively using as a home. To qualify as a primary residence, a property must serve as your home for a majority of the year and be located within a reasonable driving distance from your job. You must also begin living in the residence within 60 days of closing.
Mortgages for a primary residence are typically easier to qualify for than other residency types. The mortgage rates are also often lower, with lenders seeing them as a far more likely to generate consistent payments. Defaulting on your mortgage could result in you losing the residence.
What is an Investment Property?
True to its name, an investment property is a residency that you intend to use for investment purposes. Instead of living on the property, you’re generating revenue from letting others stay or live there. This can take the form of renting, leasing, vacation homes and other options. A residency qualifies as an investment property if it’s located within 50 miles of your primary residence and has no long-term occupants living in it.
Mortgages for investment properties tend have high interest rates and down payments averaging 20% or more. Not having a consistent tenant on site to keep up with maintenance, lawn care or security means that investment properties are higher-risk investments for lenders. They’re also far more likely to generate late or unpaid mortgages, since homeowners generally choose to pay for their primary residence over one they aren’t living in.
Start Your Investment Property Journey Today!
Are you ready to begin the hunt for your perfect investment property? The DRK team is on-hand to help you. Our team of investment advisors will answer your questions about mortgage rates, suggest properties that will fit your needs, and help you through the buying and lending process.
Take a look at the commercial property available for lease in the Columbus, Ohio, area right here.
Until next time,
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I'm an experienced professional in real estate and mortgage matters, and my expertise extends to the distinctions between different types of residential properties. With a background in both real estate transactions and mortgage lending, I can shed light on the nuances of primary residences and investment properties.
Firstly, let's establish the critical differences between a primary residence and an investment property. A primary residence is essentially your long-term home, where you and your family actively live. It's the place where you spend the majority of your time, and it usually needs to be within a reasonable distance from your workplace. On the other hand, an investment property is intended for generating income, typically through renting, leasing, or other means. While an investment property may be suitable for living, its primary purpose is financial gain.
Now, let's delve into the specifics:
Primary Residence:
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Intended Use: A primary residence is actively used as a home by you and potentially other occupants.
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Occupancy Requirements: It must be your primary place of residence for the majority of the year, and you should start living in it within 60 days of closing.
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Location Criteria: It should be within a reasonable commuting distance from your workplace.
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Mortgage Terms: Mortgages for primary residences are generally easier to qualify for, and they often come with lower interest rates. Lenders view them as lower risk due to the likelihood of consistent payments.
Investment Property:
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Intended Use: An investment property is used for generating income, typically through renting, leasing, or other investment strategies.
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Occupancy Requirements: It is not occupied by the owner as their primary residence, and it's usually located within 50 miles of the owner's primary residence.
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Financial Considerations: Mortgages for investment properties tend to have higher interest rates and often require a down payment of 20% or more. This is because they are considered higher risk by lenders.
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Maintenance Challenges: Investment properties may lack consistent on-site occupants, leading to potential challenges in maintenance, lawn care, and security. This makes them riskier for lenders.
Understanding these distinctions is crucial when navigating the mortgage and real estate landscape. While primary residences offer certain advantages in terms of mortgage terms and qualifications, investment properties come with higher financial considerations and risks. If you're considering venturing into the realm of investment properties, it's essential to be well-informed and potentially seek professional guidance to make informed decisions.
