Hello to everyone reading this post. I was reading some post concerning Interest-Only Loans and Adjustable Rate Mortgages. I understand that the homebuyer (non-investor) should be concerned about interest-only and adjustable rate mortgages because home prices can decline, the payment on the loan is not really influencing principal and interest rates can spike without the homeowner being able to refinance.
For the real estate investor with the intention of holding a property for a short period of time or flipping, the ARM and IO loan should not be a major concern since he plans to resale immediately. I can see the ARM or IO loan being a concern if the investor intends to sell the property on a 2-3 year lease option to tenant buyer.
My questions are :
Can it be detrimental for an investor that has the investment strategy to resale a property for a short term period (1-2 years) to select a ARM or IO loan?
Thanks for the feedback.
To answer your questions:
If you intend to sell the property in 1 or 2 years, then you should absolutley get an ARM. The payment will not adjust during the period you have the loan and your rate will be lower than a fixed rate.
There are always “What If’s” - What if you decide you want to keep the property beyond the 2 years? Look at 3, 5, 7, 10 year adjustables. Although with the bond market relatively flat, fixed rates and adjustables are pretty close right now, so there’s only a slight pricing advantage to an ARM.
As for interest only, this is a much tougher question. There is inevitable risk here. But I like the odds of this risk in my market, No. California, and many others. You should know your market trends - upwards, down?
I actually just helped some personal friends finance a place on and IO ARM. They intend to sell in 2 years.
What if the market drops and you lose value? Well then you have to hold the property longer than you originally planned. Because eventually the value will return. But how long will it take: 3 years? 5 years? Interest only is a calculated risk. Don’t get an interest only because it’s the only way you can afford the property; use it as a tool to leverage and utilize your equity.
Each investor and investment is different, so weigh out all your options.
Here’s an addition: What if you have 20% or more equity in the property and you intend a really short term sale? This is one of the few cases, I suggest an option arm or neg am loan. Someone rehabbing a property that intends to keep the property only a matter of months. This will give the lowest payment option to free up monthly cash flow to put towards the remodel. The deferred interest should be offset by the short timeframe and the increased value from the work done.
I hope this is helpful. I wish you the best in success!
I appreciate the information wigglers and the wishes of good fortune in my investment projects. I have some other questions about the content in the response you provided.
- Does the term “neg am loan” mean a negative amortization loan?
You mentioned in your respone that an investor should consider acquiring an “interest only” loan or “neg am loan” if he desires to rehab a property with the intention of keeping the property only a few months.This will give the lowest payment option to free up monthly cash flow to put towards the remodel. The deferred interest should be offset by the short timeframe and the increased value from the work done.
2.In this scenario, has the investor acquire the property using conventional financing or hard money? If the investor utilized hard money to finance this deal, would cash flow be an issue because the rehab money will be placed in escrow for repairs?
- Would it be more likely that acquiring the “IO loan” or "neg am loan is more relevant to a situation dealing with a buyer in a subject to-deal than a lender or bank selling the property?
Thanks for answering these questions?