Traditionally, 30 Year Fixed Loans have been used for investing. I was curious what your thoughts were on using Interest Only ARM loans with the first 5, 7, or 10 years at a fixed rate.
How long are you looking to hold?
will the property cash flow on a 30 year fixed ?
are you interested in cash flow today or payout tomorrow?
That is really all it comes down to!
Rob is right. It is all about your intentions for use of the property. Is it a long term investment (rental) or short term (flip).
Long term you should lock in your rate with a longer term program 30 year. This way the rate is locked and you need not worry about your payment going up. (Taxes and Insurance will )
The I/O ARMs are great for short term cash flow. So if you are not planning on keeping it for the 3,5,7, year term…get the lowest payment possible.
right now for investment loans, the 3,5,7 yr interest only are only marginally better
than the 30 yr fixed.
i just got a 30 yr fixed with first 10 yrs interest-only at 7.125%.
the ARMS were 6.625% and above. [ this was a few weeks ago and rates change daily]
I think if it was a real nice house I could see myself owning for a long time I think the 30 Year Fixed would be best. In this case, I think I am gonna go for the 30 Year Interest Only ARM with the first 10 years fixed. This is on a relatively new condo. I don’t think I will have it past 10 years. The idea of having this condo when it gets old does not appeal to me too much. The 10 year fixed was only .25% more than the 5 year fixed so I am gonna go for the 10 year fixed.
I think it is important to have cash flow on every deal. I don’t want any alligators trying to eat me and my wallet. ;D
I just talked to another investor who is using 40 year io loans for flipping.
why use a 40 yr product if you’re going to flip immediately???
doesn’t make sense unless he’s wrapping the mortgage.
Not sure why, but I am guessing for a lower payment, why do people get a 30 year for something they will have for 3 months or so ?
Me personally, I could care less what type of mortgage I get for a flip, whatever gets me the least amount of holding costs is what I would take,
as long as I make a good profit for that 2 to 4 months of rehabbing, dont matter to me.
If they come out with a 50 yr, I would take that too, lol.
I will try to find out why he chose a 40, may be other reasons.
Forgot to mention…the 40 year isnt fixed, it offers a realy low rate at first (1 or 2 years) than goes up.
Then why not just get a 15 year fixed if you’re flipping?
Taking a 40 over a 30 makes no less sense than taking a 30 over a 15 if you’re flipping.
Why anyone gets a 30 year fixed when they will be in the house less than 5 years makes no sense to me, but people do it all the time.
It is sometimes more difficult, depending on the borrowers parameters, to qualify for a shorter amortizing loan. Especially if it is for an investment property.
MD-
I would challenge your last statement. I underwrite loans for a Mortgage Lender and it’s the other way around. It’s actually more often that the shorter term is easier to qualify for. For a lender the longer the term the higher the risk. More risk means the qualification is more difficult.
We have brokers who submit 30 year apps who get turned down but 15 year notes are approved all day. The same goes with 40 year programs, they are more difficult to qualify for but I’ve changed the borrowers to a 30 year note and approved the loan many times.
Now, if you meant ARMS are more difficult to qualify for so they go fixed instead, that I agree with.
They used to have 100 year loans in Japan when real estate went through the stratosphere over there. I don’t know if they still offer them over there.
When you’re flipping you want to pay the least possible in holding costs. Payments on a 15 year loan are more than a 30 yr or interest only loan.
When I buy a long term rental I’ll probably get an interest only loan but overpay like a regular 30 year loan so I knock down some principal. This way if an unexpected repair bites me or extended vacancy, I can pay the lower amount that month. Then in ten years when they recalculate my monthly payment it will be based on a lower principal. Does this make sense?
Mike
Mike in Cali. That’s why I said it makes no less sense. Meaning that people get 30 year loans all the time when flipping and no one batts an eye at it. But if someone gets a 40 year note they make it sound silly. But it’s not silly, it’s the same logic as NOT getting a 15 year note.
I might be a bit more conservative than others. However, since i am in the lending industry I read a lot of artices about the industry.
One thing to be aware of is property value. Interest only loans pay off zero principal. Wth the housing bubble where it is values are volitile right now.
When this bubble is fully deflated 2 or 3 years from now your property may not be worth what you paid for it. you may want to sell it and find out you owe more than it is worth.
This is just one thing to consider.
It all depends on what you do with the money you save from one loan program to another.
Suppose you have 2 loan options A and B.
Option A is a 30 year with fist 10 years of I/O loan that you pay $600 per month on.
Option B is a 15 year loan with payment of say $1000 per month.
These numbers are just for the sake of argument.
If you take the extra $400 in savings and put that toward principle you’ll actually pay down the loan just as fast and if you don’t want to, then you don’t have to. Conversely you could put that $400 toward an investment vehicle that generates good returns and come out on top even if your house doesn’t appreciate.