Interest Only Mortgage For First Investment Property

Buying & Selling Real Estate
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Interest Only Mortgage For First Investment Property

Renate Brison
Silver Spring, MD · Member since 2016 · 4 posts · 1 vote

Is it a good idea to use an interest only mortgage to finance a first time investment property?

What are the pros and cons of an interest only mortgage?

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Joe Abughazaleh
Investor · Las Vegas, NV · Member since 2013 · 131 posts · 63 votes
10y

@Renate Brison I wouldn't suggest getting an interest only mortgage. Interest rates are very low at the moment you can lock in a 15yr or 30yr for 2.6-3.8% that's super cheap and it's fixed. Usually interest only loans adjust after 5-7 yrs. You can get yourself into trouble down the line if you hold a property and it adjusts higher and can't sell If the price drops. Think it works if your flipping properties, but if it's your first investment I would lean towards the safe side. Always have a plan B or exist strategy. 

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  • Joe Abughazaleh
    Investor · Las Vegas, NV · Member since 2013 · 131 posts · 63 votes
    10y

    @Renate Brison I wouldn't suggest getting an interest only mortgage. Interest rates are very low at the moment you can lock in a 15yr or 30yr for 2.6-3.8% that's super cheap and it's fixed. Usually interest only loans adjust after 5-7 yrs. You can get yourself into trouble down the line if you hold a property and it adjusts higher and can't sell If the price drops. Think it works if your flipping properties, but if it's your first investment I would lean towards the safe side. Always have a plan B or exist strategy. 

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  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Renate Brison, it's a worry for your investment-readiness if you feel the need to chase short-term savings of only $3-4 per $100, while the amount owed doesn't decrease at all.

    Of course, Banks love interest-only repayments! They get almost of much out of you all the while, and retain the right to adjust the interest rate in their favor after say 5 years, at which time you STILL owe them as much as you borrowed! 

    It's true that IF appreciation continues like it has over the last 5 years, the loan as a PROPORTION of the property's value will start lessening (slowly), but, that's a BIG "if"! 

    And even then, in this low interest environment, I'd still have recommended a conventional loan! 

    My 2c. Welcome to BP! All the best...

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  • Michael Kappel
    Investor · Acworth, GA · Member since 2010 · 30 posts · 6 votes
    10y
    Renate Brison I agree with the others, interest only loans have a burned me in the past. Back in 2006 we got into the rent to own market and did a bunch of interest only loans thinking that the tenants would cash us out after a year or two. Obviously The tenants did not cash us out and we were stuck with loans that have no principal paydown 3 to 5 years later during the crash. I would highly recommend staying away from interest only loans.
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  • Renate Brison
    OP
    Silver Spring, MD · Member since 2016 · 4 posts · 1 vote
    10y

    Thanks gentleman for the great responses and information. Can you guys suggest great options for raising down payments using no money of your own??? Thanks. I am currently heading into my first deal, and I would like to tie up as little of my own cash as possible. 

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  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Renate Brison, there's plenty of threads that talk about getting into the game with next to nothing. A lot of them talk about getting cash by wholesaling properties, but my opinion of that is: it's gurus who make the most money that way, charging money to teach newbies/wannabes!

    ie. Wholesaling is hard work (think: job), and the returns for all your effort are not guaranteed, while the returns for TEACHING people how to wholesale seem to be much more lucrative!

    Some other ways are: joint ventures; private loans; hard money lenders; or seller financing.

    But my advice is: if you have cash (as you have indicated), USE IT! 

    How else is having cash helping you, if not for use as a deposit?

    My next advice is: do everything possible to ensure your deal/s are "smokin'"! Cheers...

    1Reply
  • Renate Brison
    OP
    Silver Spring, MD · Member since 2016 · 4 posts · 1 vote
    10y

    Thanks @Brent Coombs much appreciated. Your advice is sound. Thanks again. 

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  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    10y

    We usually do so up front with a private lender while we're doing the rehab to keep our costs down and because banks won't lend on appraised value up front, only what you have into a property. But I think you eventually (and sooner rather than later) want to get an amortized loan on the property. Otherwise you're relying solely on appreciation to build equity and as I see it equity build up is where the real wealth creation in real estate is at. Yes, you have increased cash flow with interest only, but principal paydown sort of acts as forced savings and your interest rate will almost always be higher with an interest only loan. Now if you can get a 3% interest only loan, on the other hand, then sure, go that route.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    if you go interest only just make sure their is no penalty for for adding principal then add principal every month.. I know on my personal investments I always round up to the next 1000 dollars so I am always accelerating my principal paydown.. 

    Although these super low rates that are bandied about are generally for owner occ loans. investment loans you will have a hard time finding in the 2 s and 3s amortized or not.. especially if your new .

    @Michael Kappel  having been in the distressed RE space my entire 42 year career I can count on one hand the amount of lease options tenants that bought a home from us.. its a pipe dream and those that built business models on taking bad credit folks and thinking you could repair their credit and then they would buy the home.. that simply does not work.. there were a few folks who really did not know what they did not know and got investors into these deals.. the investors thinking they are going into a short term high yeild only to find out they just bought a rental  LOL.. 

    I have though sold on lease options successfully to GOOD credit folks that were transferred and just needed to sell their home somewhere else to be able buy our home.. But bad credit folks are pretty tough its just a glorified rental is all it is.. and of course you get a little more up front and maybe a littel more rent.. and that is OK... but I heard lease options in Texas are no longer legal or at least ones over a certain amount of time.. can you update me on that ?

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  • Renate Brison
    OP
    Silver Spring, MD · Member since 2016 · 4 posts · 1 vote
    10y

    You guys keep mentioning private lenders? Where does one come across private lenders? And what are their usual conditions?

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    "Friends with money"! Depends. How good are YOUR negotiating skills?...

    0Reply
  • Kirill BensonoffBusiness Member
    Vendor · Brookline, MA · Member since 2017 · 12 posts · 1 vote
    3y

    Interest-only loans are generally suited to investors or buyers who are in a good financial position and who only plan on owning the home for a few years. These loans work well for buyers who are disciplined enough to make payments toward the principal amount of the loan during the interest-only payment stage. For first-time investors who don’t plan on owning the property for a long time, this could be a good option, depending on the investing strategy.

    Pros:

    • Lower monthly payment during the interest-only payment stage
    • Helps increase your cash flow every month
    • Rates may be lower as they are adjustable

    Cons:

    • You are only building equity in the property once you start paying off the principal amount
    • The interest-only payments are temporary and your monthly installments will go up eventually
    • A lump sum payment will be required at the end of the loan which can be difficult to do

      Hope this helps! 
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