Interest Only to Fixed p&i

1 Reply

I've learned recently about longer term Interest Only loans, and ones that convert later to P&I payments, and may have an idea how to use them - I know, balloon payment bad, fixed rate good, but beyond that knee jerk reaction, please hear me out:

My question is this: would it make sense to initially use a 15 year interest only loan to keep my monthly payments low, maximize cash flow, then refi in year 12 or so? Or, to use a loan which transfers later to P&I payments (having already calculated numbers for this reality, so no surprise).

I realize I would lose the Principal pay down, although it would seem minor for the first 5 years anyway, and perhaps a 3% appreciation would help offset this loss. Additionally, I buy and fix to rent, so this adds equity, which I could use later to my benefit of refinancing in year 12 of a 15 year IO loan.

It would seem that this would provide maximum cash flow early when it is most needed for re-investing, repairs, etc., then a refi long before the balloon due gets me out of hot water later, or the P&I payment schedule is accounted for in the numbers up front, and I just accept lower cash flow later on.

Looking forward to your thoughts!

I don't like interest only loans. A traditional loan is ammortized so the interest is paid up front, with principal paid at the end. Let's say your payment is $100 a month. Your first payment is $97 interest and $3 principal. The next month is $96 interest and $4 principal. You could pay up the principal payment of $4 in the first month, and save yourself the $96 in interest. If you pay up earlier in the loan, you save so much interest over the life of the loan. 

Yes you are cashflowing more on a lower loan, but you aren't paying any part of the principal. If the property is going to appreciate 3%, it will do that no matter what type of loan you have.

Mindy Jensen, Real Estate Agent in CO (#FA100049656)

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