When to use Intertest Only loan

I would like to hear the different reasons why people use the intertest only loans.

I would like to use this type of loan so that my cash flow is alittle higher the 1st year.

Thanks auggflo

I usually would not go interest only unless there is equity already in the property and there is positive cash flow. Personally I would not want to get caught walking away from a closing after I sell the property with nothing to show for it.

Blue, what about for the 1st year? I’m a newbie and would like my cash flow to be as high as possible my 1st year.


I highly reccomend the IO option. It has the lowest foreclosure rate out of all programs, and you have 4 options every month.

What is an interest only loan?

An interest only loan does not mean you will never pay principal on a home loan. These mortgage programs have what’s known as an interest-only payment option attached to the note. In all cases the note will state how long your interest-only payments will last. Let’s use a 5 year interest-only loan for example. On a typical 5 year fixed rate under an interest-only program the interest rate is fixed for the first five (5) years of the loan term and your only obligation are interest-only payments during this term. During the beginning of the 6th year (month 61) the unpaid balance is fully amortized over the remaining term and the borrower is now obligated to make principal and interest payments to the lender. Think of it as taking a 25 year mortgage (principal & interest payments) on an adjustable rate note tied to the then current interest rates.

Who should and shouldn’t get an interest only loan?

Interest-only mortgages are pushed aggressively nowadays by lenders and brokers, but they’re not for everyone.

An interest-only mortgage might be a good fit for:

(A) someone whose income is mostly in the form of infrequent commissions or bonuses;
(B) someone who expects to earn a lot more in a few years;
(C) someone who truly will invest the savings on the difference between an interest-only mortgage and an amortizing mortgage, and who is confident that the investments will make money.

Financial advisers don’t recommend interest-only mortgages to regular wage earners who take out moderate-size home loans and don’t have a strategy for investing the savings.

With an interest-only mortgage loan, you pay only the interest on the mortgage in monthly payments for a fixed term. After the end of that term, usually five to seven years, you either refinance, pay the balance in a lump sum, or start paying off the principal.

If there were such an animal as a typical interest-only borrower, it would be an executive who earns a moderate salary and whose main income is from bonuses once or twice a year. An interest-only mortgage would provide the lowest possible monthly payment for lean months, yet allow the executive to pay down big chunks of principal when bonus time rolls around.

Business owners with unpredictable incomes might benefit from interest-only mortgages, too, because they need to maximize their cash flows as much as possible, and this is a great way of doing it, and, of course, you have the option of paying down principal whenever you want.

Some people feel that an interest-only mortgage allows one to buy more house than one can afford. This is not necessarily true. These loans appeal to people on the career fast track or younger borrowers who have a future of increased earnings ahead of them … and really want to maximize their buying power now.

Simply put, interest-only mortgages benefit borrowers who invest the money they would have paid as equity. They come out ahead if their investment returns exceed the rate of home appreciation.

“For someone who says, ‘It would be better to put my assets into a stock portfolio or college education for my kids,’ the interest-only gives you that flexibility.” This idea fits in with my philosophy that middle-class people should have the tools to manage their debts as carefully as they manage their assets.

And the interest is tax-deductible – With the tax deductibility, you’re borrowing at an effective rate of less than 3 percent. It’s a slam dunk to earn more than that with a well-diversified investment portfolio, so, why pay off the loan?

So would an Interest only loan be advisable for an investor who is planning on flipping the property in 6 months? Seems like a great way to minimize monthly payments is you’re putting up your own money and planning on paint/carpet/clean/flip.

Thanks for the input,

Your scenario would be perfect for an interest only ARM. The ARM can be for 6 month or 1 year. At times, the 5 year rate is just as good.

Sometimes the benefit of having 100% financing for your rehab can workout better than putting up your own money. You could always consider doing a cash out refinance immediately after you complete your project.

I/O loans can definitely make an impact on your cash flow. However, before you get to set on a loan product…find out what you are eligible for.

If you already have and you have been quoted rates/terms, great.

If not find out what terms/programs are available. If you are going B/C paper and even in some cases 'A" paper you are not going to have a large selection of ARM terms.

Especially in B/C there are no 6 month or 1 year terms as Investment Loans mentioned. There are only 2-3 year ARMS.

I always suggest that you qualify first, before talking programs and rates. Without the facts it is pure speculation and a lot of people get their feelings hurt.

Great point Hammertime!

The answer to the question originally posted

I would like to hear the different reasons why people use the intertest only loans.

I would like to use this type of loan so that my cash flow is alittle higher the 1st year.

Thanks auggflo

Absolutely an I/O loan will lower your payments and increase your cash flow. That is the main purpose of this type of loan.

However, not everyone qualifies for the prime rate I/O loans advertised on the radio and TV. Especially investors. Not everyone qualifies for the 0% financing from Mitsubishi for cars either.

I have new clients that are more concerned about a rate quote than qualifying or getting pre-approved (which I strongly urge).

This is like putting the cart before the horse. You can get quoted anything that you want. However, that does not guarantee that it will be available to you when the time comes.

Get preapproved, then start the hunt for the best rate/product. Otherwise, a quote is worthless.

The last 2 points were well spoken. It is essential that pre approvals be done before you begin to shop. This will make the loan process flow smoothly for you and any agents involved.

This is true that B/C loans do not offer many interest only products. A B/C loan is for clients who may not have the highest credit socres. These rates are typicall higher and have prepays.

A mortgage consultant can help review credit to see how scores can be increased. This may take time to accomplish but it will eventually put you in a position where you can qualify for conforming loans. There are plenty of interest only options available to those with higher scores.

Not looking for a quote here but just wanted to throw out an example. If I buy a home for 100K and wanted an interest only arm, what are the rates that I should be looking at? My fico is in the mid 7’s with very good dti. Do I go with a 1 yr arm? 2-3 yr arm? What about pay-option- Arms that will let you make a payment with interest as low as 1%? Great thread here. Looking forward to your replies.