Interest Only Loans

I was hoping to find out some information on interest only loans. Are these good loans?
What are the ups and down to them?
What/How are they being used for with investment properties

Hi Joe -

Standard real estate answer is: it depends.

Interest only loans are certainly good for some people and under certain conditions.

What exactly do you have in mind?

There is a great deal of private money sitting on the sidelines that would be very happy to participate in an interest-only loan if it was well-secured and had some liquidity.

Can you be more specific?

Eric C

Thats just it. I have heard lately there are a lot of people doing them. I no nothing about them and would like some opinions of others that are doing them. I am particually wanting to know the down falls. All I hear is good. But that is from bankers who are trying to sell them to me. Thanks, Joe.

Joe –

Well what’s good for your banker may or may not be good for you. Whenever you have an institutional interest-only loan, you also have a balloon payment looming sometime in the future. How do you feel about that?

And while it may be all the rage for bankers to tout these loans (for many purposes), I wouldn’t recommend them for most people.

Before you talk financing (of any kind), it’s critical that you think about your prospective purchase thoroughly.

Does it make financial sense without the loan?
Is the property a “good deal”? How do you know?
How will the property be used?
What will be the holding period?
Do you have an exit strategy?
Cash flow projections over the term of the investment?

Now, about that loan…

Is it transferable? Under what conditions?
What’s the collateral for the loan? Can it be released?
How are the payments structured?
What’s in the “fine print” – rights of offset, cross collateralization, rights of call, etc?

Here’s the deal: if a low interest or interest-only loan meets your needs, then use it. But don’t substitute it for real planning. The future has a way of surprising even the most savvy investors, make sure you can weather a few “speed bumps” along the way.

Have more questions?

Just ask. I’m not going anywhere.

See you,

Eric C

I have used interest only loans on houses that I bought with the intention to sell them out quickly (within less than 2 years). You can get such loans for a very low monthly mortgagge payment that maximizes your monthly cash flow.