Cosi and Cofi loans

Does any one have an opinion on these two types of loans for investment properties. They are based on indexes but interest rates can be as low as 1.5%. Just wanted to get some feedback.

special loans available only to persons with very good credit and loan LTVs of 80% - 95%. These loans have a unique option of loaning yourself money by making monthly payments set at a lower amount than required. Persons utilizing these options can put their equity in savings or investment accounts instead of paying it towards a mortgage.

These SPECIAL LOANS can be a COFI, COSI, 12 Month MTA or LIBOR Indexed ARM - a hybrid mortgage that combines the best of fixed and adjustable rate mortgage programs. It gives you the low payments of an adjustable mortgage - with rates starting as low as 1.25% (depending on loan program)! But, because it’s based on savings rates, it’s a very stable loan similar to a fixed rate program. This is one of the few programs that gives borrowers the low payments they want, the tax deductions they need, and a 30-year loan that may be paid off in 20 years.

The first thing you need to know is you’ll never beat the bank. If the going rate is 5.75%, they aren’t going to lend you the money at 1.25%. That being said, the Option ARMs are excellent investment vehicles because they can give you a positive cash flow. The reason its called an Option ARM is because you have the option of making a 30 year payment, an 15 year payment, an interest only or a minimum payment based on the start rate. You owe at least the interest only payment but can elect to pay the minimum payment and the difference will be tacked on to your mortgage.

In Southern California at least, the appreciation usually far outpaces the amount of deferred interest which is commonly called negative amortization.

So you get a positive cash flow from the property, hold it for a few years while it goes up in value and sell it, pay off the loan balance and pocket the profits (or put it in a 1031 exchange). At least thats the theory.

You don’t need that great of a credit rating. Most lenders will give you an 80% loan with only a 620 credit score.

Has anyone used these loans for there investment properties?

We use these extensively in Southern California. It is hard to get positive cash flow from an investment here because the price of real estate. Here is an example of a deal I just completed acting as a the mortgage lender and the real estate broker. It is not a creative financing deal, anyone can do this if they have enough equity in their home.

Mr. and Mrs. Smith are in their late 40’s. Their children are now teenagers and the Smiths were looking for a way to build a retirement income. They have managed to save only $10,000 in an IRA. They make a modest income of about $80,000 year. The home they bought 10 years ago for $150,000 is now worth $450,000. Had they bought 3, they would now have a net worth of nearly $1 million.

The Smiths tapped their equity once and have a loan balance of $200,000 with a monthly loan payment of $1600/month. PITI. Here is how we structured the purchase of a $500,000 duplex.

Step 1: Refinance residence with a cash-out refinance of $360,000 using an Option ARM with no lender closing costs. Their new house payment is $1153/month PITI. This lowers their house payment by $450/month which can be put towards their retirement fund.

Step 2: Purchase a $500,000 Duplex with $100,000 down. We structured the deal so the seller would pay the closing costs. The resulting payments are $1728/month PITI. The property has 2 units that rent for $1200 each or $2400/month. They have created another $672 per month to deposit in the savings.

Their savings now holds approximately $58,000 from their refinance (I paid their most of the closing costs for them on the loan). During the first year they will deposit another $1100/month or $13200/year from the positive cash flow. Since the properties are both financed on ARMs, their payments will go up about $85 per month on each loan. The deposits in later years will decrease slightly. However, rents could be raised to cover the increase. This example doesn’t take into account rental increases. In 5 years, their retirement fund will have $99,000 if it returns only 6% per year.

Their home which was worth $450,000 will be worth $568,000 and their duplex will be worth approximately $631,000. This is based on a 6% annual appreciation rate.

There will be negative amortization (increasing loan balances) on both loans but this will be far out paced by the home appreciation. In 5 years we will have created cash and equity of over $300,000 without increasing house payments or changing current spending habits. In fact, tax write-offs will decrease the payroll taxes paid on the Smiths regular income from their jobs so they will see a nice refund check at the end of the year.