Neg mortgage loans are they worth it to cash flow

Hi Everyone

i just bt some more rentals and my lender is telling me about these pick a payment deals, are they really worth it seems to be the only way to cash flow, is this a smat idea?


Definitely not the only way to cashflow. You just need to look for better deals and distressed sellers, not retail deals.

I would absolutely not do a negative amortization loan for rentals. If you can’t find one that will cash flow with a fully amortized loan, I wouldn’t do it.


patat335 As I said before all real estate is local. What works here may not work where you are. It may be a good deal where you are. Where are you?

The way to cash flow is buy a fixer upper or find a desparate owner.

Those Option Arms are ticking time bombs if you don’t know what you’re doing. You do negative amortization for a little while then you hit the reset period and your payment will go through the roof.

Then you try to get out or refi, but if you don’t have enough equity because the market is down, you can’t refi and you’re stuck, then you get foreclosed on. That’s what lots of those foreclosures are from, people who got option arms a few years ago and are now hitting their reset period.

It is my opinion that this loan product is not advantageous in market cycles in which:

  • There is a esculating or stagnant interest rate enviroment
  • There is a potential for depreciation

In better days, when properties were appreciating and rates were dropping, this loan program had a place and purpose.

Back then, I would recommend the product only if the my client agreed to:

a. Use the min. payment in cases of emergencies (like when the property wasn’t fully tenanted; money needed to be redirected to renovation, etc.)
b. Pay the fully amortized payment at all times (preferrable the 15 yr option).
c. The client was exiting the property and wanted to extract his/her investment before selling.

With the current yield curve, these programs just don’t stand up to scruntiny (the I/O payment option is not in line with other I/O programs available; read high side).

Deferred interest amasses quite quickly in raising interest enviroments, and once the loan is recasted, you are stuck with a payment that is 30-40% higher then when you began.

The bottom line?

Not in this market…


Scott Miller

Thanks for all you input

i live in sw fl proporty looks like they are good dealsout there, but there is alot up for rent right know. i was think about taking these loans to reduce my rents, but after all of this it does not sound like a good idea. it just stakes me that all the banks are now offering them

I would not say they are not always a bad idea. For example if you find a property in a normally appreciating area. You can buy it at significant discount knowing and you are going to sell it shortly but you want the income, negative amortization loans are ok. If you find a house that comps out at $100k and you can buy it and have it fixed up for $60k. You can rent it for $1100/month and your PITI with traditional financing is $900/month. But you can get a negative amortization loan and your note would be $500/month. You have just raised your monthly income from $200/month to $600/month. Since you have so much in equity already you can sell it in 2 or 3 years and still have equity left over. That may be a good deal.

I have considered it before because of the strategy that I use, but have decided against it each time.

Purchasing in an area with appreciating values doesn’t stave off the neg am monster when rates are either stagnant or increasing (rate changes could potentially eat any appreciation realized).

It is my opinion that we are not in an appropriate rate enviroment to justify this type of loan (barring the exceptions I mentioned in my previous post).


Scott Miller