I am trying to make my first deal happen, but am getting frustrated and a bit confused when it comes to the financing part of the deal. I was wondering if it was “allowable” to do an interest only loan on the property that i purchase, since i plan on flipping it anyways. Also, i am getting nowhere fast trying to understand and figure out the ARM types… 1/1, 3/1, 5/1, 7/1, 10/1. Could someone be so kind in helping me understand these different methods of financing.
I have told myself that it is now time to put up or SHUT UP in regards to the real estate investing and i don’t want something like financing to knock me down a notch. My wife and i have excellent credit (closer to 775 if i’m not mistaken).
I’m sure this is debateable, but in regards to REI, is it advantageous to go through a mortgage broker or a mortgage lender? I have read that the broker has more options for the buyer? Thanks for any help!!!
Most ARM programs are similar- they have a fixed period for 1,3,5,7, or 10 years, and then they adjust according to market conditions after the fixed period is over. The ARM will be tied to an index such as the US treasury index (there are many others), and after the fixed period is over, this fluctuating index is added to a fixed rate that is called the margin to determine your interest rate. The margin is fixed for the entire term of the mortgage.
So, if you have a 5 year ARM, at 61 months, your rate would adjust and would be calculated as follows:
2.25% (Margin- fixed for the life of loan) + 4.25% (Index- fluctuates each month)= 6.5%. so if the index is 4.25% at month 61, 6.5% would be your rate until the next calculation (usually every 6 months or 1 year).
There are also caps that prevent the ARM from adjusting too far in either direction within one year. None of the details of the adjustment period are important in your case if you don’t plan to keep the property.
Many lenders are offering the same or not much worse rates currently on a longer term ARM (5 year for example). The one year fixed ARMs generally have almost as high of rates as the 5 year ARMs. My belief is that this is because lenders know rates are going to start to go up and they don’t want people to get into a one year ARM and then have their rate adjust up 2% after the first year and then all of a sudden they are a foeclosure candidate.
Interest only is a great idea as it will keep your payment low. You can definitely take this feature of the loan and it will not matter if you intend to flip.
Another interesting product is the Option ARM.
Hope that helps- that was a big question.
would it be bad to do an interest only loan of 200,000 on a 4-plex unit and then just pay toward principal when you have good cash flow? Right now i figure when all units are rented out, i will be making about $300-$500 per month, but if i do interest only, it would be probably closer to $800-1000 per month. The property is in a prime location, so i think it definitly will be going up in value. Any thoughts?
Is the 4 plex a retirment plan for you? What is more important, monthly cash flow or paying it off eventually for a retirement stream of income, or making money on appreciation? You will pay little toward principal in the first several years of a 30 year mortgage anyway, and if the property is going up in value, I would say pay the interest only payment and put some cash in your pocket each month. If you end up keeping it 3, 4, 5, 6 years, etc, your rents will then be higher and then consider paying down the balance.
eventually, i would like to own it for a retirement supplement, but you hit it right on the nail there. I will be paying very little toward principal the first few years, and i think if i do the interest only loan i can put a lot of cash in my pocket and pay a percentage of that toward my principal each year or month. So i will see if i can do the interest-only loan as i do not know if i will keep it for a long time. What do interest-only loans usually run for percentages? Right now i am doing an 80/20 loan with the 80% being a 6.8% for 30 years and the 20% or second mortgage being a 11.125% interest rate for 15 years. Im thinking of doing the interest only on the 80% and just doing my regular payments for the second mortgage, and then refinancing that to a lower interest rate in 6 months or so.
Yes, those rates are pretty good (if with no points)- are they with points or without points? If those are no points rates, then they are good, however, I only have one lender who will do 100% on investment properties, and the trade off for points is extrememly good (.75% lower in rate for one point).
This makes the break-even point on the monthly savings vs. up front cost at about 2-3 years which is very good. If you are talking about a 5 yr ARM, that would be something to consider. In this investor’s case, that would get your first mortgage rate into the low to mid 6% range.
also, mortgage points are tax deductable in the year you purchase the home. If you use points when you refinance, you must amortize the write off over the life of the loan (can only write off 1/30th of the points each year).
Your idea on the 2nd is a good one, especially if the home goes up in value because in 6 months you may be at 95% CLTV.
i dont really understand points, but it is without buying points. How much do points cost.
POINTS ARE USUALLY 1% OF THE LOAN AMOUNT SO IF YOU HAVE A 100K LOAN YOU WOULD PAY $1000 FOR IT
NOW TO SOME OF MY INVESTORS I TELL THEM THAT IF THERE ARE PRE PAID PENTALIES BEING FORCE ON THE LOAN AND YOU KNOW YOU ARE GOING TO FLIP THE HOME IN LESS TIME THEN IT WOULD IN SOME CASES WORTH PAYING THE DISCOUNT POINT (S) FOR IT VERSES PAYING 6 MON INTEREST PAYMENTS.
1 point = 1% of loan amount.
1 point will allow you to get a lower rate by anywhere from .25% to .75% depending on the loan program and lender.
Usually on fixed rates the benefit is less than on ARMs as to how much you can buy down the rate with one point.
A good broker can help you analyze the break even point on paying points (up front cost) vs. not paying points (long term higher cost).
another thing is that points are tax deductible in the year you purchase the home. For a refinance, you have to amortize the tax deduction over the life of the loan (can only deduct 1/30th each year).