Real Estate Forums

REMAX LV · 05-20-2005, 02:14 PM

Hey do most of you find your clients using the interest only mortgages? I've noticed with rising rates and prices that is becoming alot more popular?

afm1 · 05-23-2005, 09:13 AM

REMAX LV,

I do. The last 5 out of 6 mortgages that I originated were interest only loans. Most times, because I am in a hot market, I have to give them the interest only loan so they qualify for the house size that they want to buy.

I love interest only. It gives the borrower a ton of flexibility on a monthly basis. No one ever said they can't apply extra money towards principal if money permits.

SEOWolf · 05-23-2005, 01:41 PM

Question for you afm1.

In a hot real estate market like Las Vegas or San Diego, I was thinking that an interest only loan would be my only way to make an investment.

If recent historical rates of appreciation are consistent, although I won’t actually pay on the principle, I will still accumulate equity right?

Or am I missing the boat here?

~VegasMack

afm1 · 05-23-2005, 02:58 PM

Yes. You will still have equity.

Eqiuty is the difference between the Appraised Value/Purchase price subtracted by what you owe on your mortgage.

In other words if you buy a house for $150,000 and pay interest only for 5 years and then sell the property for $210,000 your balance will still be $150,000 because you did not pay down principal.

Therefore, you take $210,000 subtract what you owe $150,000 and your profit (ie. equity) is $60,000. Capital gains on the money you make is a discussion for another day

.

To answer your question, it really depends on what your goals are. I would highly recommend interest only if you are looking to cash flow the property and then sell it in a few years assuming the property is an area that you described (ie. high appreciation %'s). If your plan is to pay down the mortgage over time and have a huge asset for retirement, or if you want to borrower against the properties equity, then you may want to look at a fixed rate product that pays down some principal.

Everyones goals are different. I hope this helps.

SEOWolf · 05-23-2005, 03:19 PM

The goal is to find a way to invest in the Las Vegas or San Diego market to be able to keep pace with appreciation rates.

If I just save the money to buy a retirement home in either place, the rate of appreciation far exceeds CD rates making the gap wider every year.

I was thinking that possibly a Zero Principle loan would keep the payments low enough to be able to rent the property out and not have a negative cash flow and still see appreciation down the road.

Does that make sense afm1?

And can you get a Zero Principle loan on a second or third home?

Thanks,

~VegasMack

judyo · 05-23-2005, 07:46 PM

And don't forget, you can always pay something towards the equity if you feel like it (as long as you designate it that way with the payment).

afm1 · 05-24-2005, 08:34 AM

I am not sure what you mean about a zero interest loan. You still pay interest on the money borrowered depending on what rates are doing. But, you don't pay principal.

There are catagories of homes. Owner Occupied (your primary residence), Second Home (lake house, resort type), and Non-Owner Occupied (investment property that you rent).

You can do interest only on all 3 scenarios. You can also do some aggressive borrowing now. Some investors even allow 100% financing on investment properties, but you would have to go "full doc" and prove your income. This is an aggressive program and your payments will be high.

You can pay interest only and apply money towards principal as money comes in from month to month. I would recommend a 5 year ARM interest only. Get some equity and then refinance into a fixed mortgage at 25, 20 or 15 years respectively. It all depends on what you can afford. Then I would also do bi-weekly payments to knock off some interest. On average, you can save 7 years on a 30 year mortgage, about 4 years on a 20 year mortgage and 2 1/2 on a 15 year mortgage by simply paying your mortgage twice a month.

SEOWolf · 05-24-2005, 09:55 AM

My Bad afm1!!

I meant Zero Principle Loan.

With that in mind would my scenario work for my post above?

Thanks,

~VegasMack

afm1 · 05-24-2005, 11:24 AM

It would work if the numbers work. There comes a point in the equation where an expensive house will not make the numbers work.

Here is a system that one of my investors uses.

Buy a house for $125K, mortgage is $500 a month, he rents it out for $800 per month cash flowing $300.

Buy a house for $250K, mortgage is $1300 a month, he rents it out for $1400 per month cash flowing $100.

Once you hit a certain price, the numbers do not work. You can get more money for a cheaper house than you can for a home that costs more.

Last example, lets say you buy a house for $450K or even $550K. How much can you get for rent to off set the mortgage? Maybe, just maybe, $2500 max. Now buy a house for $250K and charge $2000 a month in rent.

Get it?

HHI Golf Guy · 05-24-2005, 02:35 PM

Quote:

Originally Posted by afm1

I love interest only. It gives the borrower a ton of flexibility on a monthly basis. No one ever said they can't apply extra money towards principal if money permits.

While I agree that it is an attractive form of financing, and let's face it - it makes it a heck of a lot easier for agents to sell some homes. But I can only imagine how many people are currently buying beyond their means.

Regarding interest rates, our economy is in decent shape. But every 10-15 years we seem to go through a period where interest rates skyrocket. That may happen again, or it may not. But if it does, there certainly are going to be a ton of foreclosures involved with this type of financing.