Is it good to use a interest only loan for investing in a home that will be used for a rental property and then refinance later?
In my opinion it’s not. Because you’re not paying anything towards the principal of the house the only thing that interest only does is make your payments lower. What if the value of the house goes down or it stays where it is then you have nothing to refinance. If you choose this route just make sure that you are walking in with instant equity.
Because you're not paying anything towards the principal of the house the only thing that interest only does is make your payments lower.
There is nothing saying you can not make principal payments at anytime on an IO. What you are really saying is that you can not trust yourself to do so and wish to be LEGALLY bound to making those payments as dictated by the lender.
When you have an IO loan, you free up your capital to work elsewhere and make you even more money. You are also free to pay on your principal at your leisure.
I think what is also important is that you ask yourself, what is the purpose of this property? Is it your baby that you will retire on or just an investment?
There is no clear cut answer as to what you should do because there are so many personal variables involved.
Make sure you read over your paperwork and try if possible to stay out of any loan that has a pre-pay penalty.
I’m not saying that I can’t trust myself what I am saying is exactly what I said with interest only payments they will only go towards the interest. I did not say you can’t make payments towards the principal. As far as being legally bound. With interest only or not unless you have cash you are still legally bound. I take it you have an interest only loan that is why you are so objective to my response. I also think that you have valid questions but, as it stated it is for investing. Another reason I am saying this because I have seen a lot of people in foreclosure with interest only deals.
Are your plans short term or long term?
short term you can refi anytime, but remember to check for prepayment penelty.
long term… you will get a big ballon payment,
If you want a low monthly payment then interst only is the best way to go, but all loans have there pro’s anc con’s. I say if it gets you in the property go for it, as long as it makes sense
On investment properties, IO loans may be OK for the short term. It means lower payments but no buydown of the principal. On the other hand, (besides four fingers and a thumb) all of your mortgage payment is tax deductable. When you sell, all you will have is the market appreciation of the property. This may not be a big deal in the short term because so little of the first couple of years’ payments go to principal any way…
Just my two cents.
Keith
If i would do it would be short term, i would refinance within two months, is that ok?
just remember that your not paying anything on the loan inself.
It all up to you, and what out for that prepayment penalty
Interest Only (IO) is the only way to go!!! For both Homeownership and Investment Property.
Let’s look at both!
1.) IO cost less and the interest rate is usually much less for the same time interval. Conventional Loans (CL) are higher interest and are back loaded for principal.
2.) IO allow flexibility to increase cash flow and to pay down the loan at your convenience and also note that the difference between an IO & CL payment amounts are much greater than the principal applied to the CL mortgage. So if you wanted to pay the same amount, the IO with the extra difference pays your principal down faster.
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Which would you rather have? $250,000 cash or $250,000 in home equity? If the answer is cash, then IO is the right choice.
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Why do you want to pay off the loan? Why not take out the equity and keep an IO loan going. You keep the cash and your payments will be lower than CL, plus you get to deduct your expenses (Interest). Also, note your cash flow, Tennant Payment minus Mortgage Payment will be larger with IO than CL.
Interest Only (IO) is the only way to go!!! For both Homeownership and Investment Property. Short Term or Long Term!!! (BTW, IO can be for 1 yr to 30 yrs but I do either 5 or 7 yr increments.)
Let’s look at both!
1.) IO cost less and the interest rate is usually much less for the same time interval. Conventional Loans (CL) are higher interest and are back loaded for principal.
2.) IO allow flexibility to increase cash flow and to pay down the loan at your convenience and also note that the difference between an IO & CL payment amounts are much greater than the principal applied to the CL mortgage. So if you wanted to pay the same amount, the IO with the extra difference pays your principal down faster.
-
Which would you rather have? $250,000 cash or $250,000 in home equity? If the answer is cash, then IO is the right choice.
-
Why do you want to pay off the loan? Why not take out the equity and keep an IO loan going. You keep the cash and your payments will be lower than CL, plus you get to deduct your expenses (Interest). Also, note your cash flow, Tennant Payment minus Mortgage Payment will be larger with IO than CL.