Interest Only Or Fixed Mortgage
As a beginning investor wanted to know what other investors are doing. Is it best to go with a fixed mortgage or the Interest only loans? IO loans obviously increase cash flow but you run the risk of rates moving against you versus the flip side. Any thoughts?
If you are holding long-term, I would not do interest only. If you are have to do interest only to make something cashflow, it is not a good deal in my opinion.
Interest only is good for places you plan on flipping or holding short term.
Thanks for the reply. What about the option arms that have these low payments as a way to protect from rates increasing? Seems great if you pay a little extra each month to avoid neg am.
I hear alot of the "oldtimers" talk about short term loans. How long is short term? 3mos? 6mos?
thanx :-?
I'm no oldtimer but I would consider short term anything under 2-3 years.
I'm a big fan of arms, particularly interest only arms. You can get it fixed for 3 or 5yrs or even 30 if you wanted. The option arms are great as well. It's just a smart way to use your money. Being a mortgage broker, I show people all the time how to make the most of their money. You can make the same payment on your interest only loan as you would on a 30yr fixed but would substantially increase you equity by paying off more principal. You could also use the cashflow for other properties.
This is a matter of opinion --- I do not agree that Amortized loans are better for long term investment purposes. Interest only loans are best for long term. It increases your cash-flow and you have more cash to invest in other deals. $50 today is worth way more than $50 of tommorow (Present Value/Future Value). Assuming you can qualify for an interest rate of 6% and you can earn 12% on your money....Why would you want to pay down a 6% loan? Effectively you would be losing big time by paying down principal.
In any event on almost every loan you can pay down principal as if it were amortized if that satisfies one emotionally.
Financially speaking I/O is the best way to go. (In my opinion) [ Edited by roboxking on Date 10/12/2004 ]
But let me ask this then. I do agree that I/O loans are great for cash flow but if rates move against you on all your property couldn't you potentially be blown up? Or is it your opinion then that rates will stay reletively low with LIBOR loans?
If you are worried there are Fixed Rate Interest only loans out there. Or you can do something like a 7/1 (7year fix, then adjust)
Or you can just make sure that your loan as an interest rate cap. [ Edited by roboxking on Date 10/12/2004 ]
What are your thoughts on the 6 month LIBOR over the next few years and are they what you're using on your investment homes, if I may ask.
On investment homes that I have conventional financing, I have been using fixed rate 1st , and a adjustable seconds or HELOC.
I do not want to comment on the 6 month LIBOR since I have no idea how it will turn out. Chances are that it will go up. Study a historical index.
Just a do a google searh[ Edited by roboxking on Date 10/12/2004 ]
I origianally started using fixed rate 30/yr. loans. I'm now taking my brokers advice and trying I/O loans on three properties I am working on. I'll have to let you know a few years from now whether this was smart or not. I'd be curious about this....I am buying two which are under appraised value. I'm elevating the purchase price to appraised value and having the seller kick me back money for 'repairs'. I'm now walking w/cash in hand, little or no down, still cashflowing and have money to do other deals...smart or really dumb?
Smart. You keep the values in the area to par. And have money to do other ventures.
Thanks, I'll sleep better tonight...
As a broker/homeowner you should not use up the capital on an appreciating asset.
Keep in mind any adjustable mortgage is tied to an index so check the performance of that index. If you can qualify you want to be tied to cosi, cofi, codi index. These indexes are tied to bank savings accounts which means stability. You also want to know the margin (lender's markup) because if this is to high you need to consider another lender.
Equity does have a rate of return and its zero. As mentioned earlier present value/future value. If you aren't familiar with this information fire your mortgage broker because your losing money.
Good Luck