Are you interested in a low rate 10-year interest only Mortgage? Apartment Loan Store has one of the best interest only permanent loan programs in your area. Please call one of our friendly loan specialists to find out more. We can also arrange an interest only bridge loan for you to renovate a property. For what purpose would a real estate investor want an interest only loan? The purpose is to have a much larger amount of monthly net income left over after making loan payments. Our interest only mortgage can give you from one to ten years of interest only payments.
Interest Only Payments Compared to Amortizing Payments
Let us compare the payments of an interest only perm loan with an amortizing loan. Both loans are for $1,000,000 and both have an interest rate of 5.00%. The amortizing loan has a 25 year amortization with monthly payments of $5,846. The Interest Only Mortgage has monthly payments of $4,166. The interest only financing puts $1,320 more in your pocket every month or $15,840 annually. Over a 10 year period this adds up to $158,400 more in net cash flow.
What is an interest only loan? It involves a mortgage that for a certain number of years (set term), interest on the loan is the only thing that is paid in monthly installments. The balance of the principal does not go down with each payment. The majority of interest only loans on investment real estate are hard money or bridge loans which are used to fix and flip properties. These are temporary loans usually with terms from one to two years.
Three reasons to choose an interest only loan:
1. Remodeling the Property Over Time: You are refinancing your apartment complex and you want extra money to put into your property to improve the units over time. This is to be followed by increasing the rents over the course of time. Interest only can substantially give you lower loan payments resulting in your having more money to invest in renovations.
2. Saving to Buy More Property: You want to save for buying more investment properties. You can sock quite a bit of cash away every month to do this with interest only payments.
3. You Need More Income Now: You do not have quite enough overall income at this time in your life, but you anticipate greater income in the future. Maybe you just need more money to live on now, or perhaps you are putting two kids through college. Perhaps in a few years you will have your residence paid off, and your kids will be on their own, which will free up quite a bit of money for other purposes. So the interest only loan is a means to get you financially to a better place in the future.
Three reasons not to choose an interest only loan?
1. Not Increasing your Net Worth: Instead of getting an interest only loan, make principal and interest payments to increase your equity. For example, what if instead of doing a 10-year interest only program, you do a principal and interest loan program, and at the end of 10 years, you’ve paid your mortgage down by $250,000. Now you have $250,000 more wealth and net worth, putting you ahead of where you would be if you did an interest only mortgage.
2. You Are Not Good At Saving: A husband and wife although making a good income are in the habit of spending everything they earn and have just never developed the habit of saving—so of course a 10-year interest only loan on a small apartment building is very attractive to them. Would it not be better to make payments of principal and interest to pay their equity down? This would force them to save over time. They could do a cash out refinance in 10 years and put a nice chunk of cash into savings. The best strategy for this couple is likely for them to get an amortizing mortgage, combine this with the appreciation of the property over time, and thus increase their net worth substantially.
3. Not a Recession Proof Strategy: A married couple choose to get an interest only mortgage payment for a purchase of an apartment building, and as in 2. (just above), they are spending everything they earn and find it hard to save. But this time, when their interest only loan expires in 10 years, they have to refinance when the economy is in a recessionary period. Real Estate values have declined. Because they had not done a loan with principal and interest, they now are in the negative on the amount of equity value of their property. If they had paid down the mortgage over time they could refinance with lower payments. Now they are in jeopardy of losing the property.
Is an Interest Only Mortgage Right for You?
There has been quite a debate over the years as to whether interest only loans are a good choice. Some conservative financial advisors think interest only mortgages are down-wright dangerous. This is because you are not paying the mortgage balance down. Community banks rarely offer interest only mortgages. They have seen it all. They worry that if rents were to go down in the future because of a recession the property value would fall. Paying down the principal over time is insurance for them. In the worse scenario, you might not be able to refinance the property when the interest only mortgage term is up. The opposite point of view is that rents usually go up and if you can keep raising the rents every year, your property value will go up over time and there will be no problem refinancing in the future. So in this scenario, why not put the money that would go towards reducing the principal every month into your pocket instead of the lenders pocket? Ultimately, you need to know your strategy for owning the property and be able to evaluate the risk in your market to make a decision. If you need the extra net cash flow for any reason, and you are confident that rents will continue to increase along with your property value, an interest only mortgage is probably right for you.
For More Information on Our Interest Only Loan Programs
Call one of our friendly Apartment Loan Store loan specialists or go to:
By Terry Painter/President
Apartment Loan Store and Business Loan Store