30 vs 40 year

[Arsalan J Khan]

I’m just getting into my real estate journey and am working on understanding all my financing options when it comes to my first purchase. I recently spoke with a lender that is able to offer a 40 year mortgage with 10 years of interest up front. Wondering if anyone has experience with this type of loan? I know the overall interest is higher but the trade off of a low monthly seems to make up for it? What’s the drawback other than higher interest paid?

Purchase: 1,100,000

25% down

12k monthly income from rent 

[Robin Simon]

by 10 years of interest "upfront" you mean the first 10 years of the term are interest-only, right?  Not like an upfront payment at closing of 10 years of interest?

[Arsalan J Khan]

No the interest is paid over the first 10 years 

[Bill Brandt]

I would consider it basically a 10 year interest only loan. As “the experts say” there is zero chance interest rates won’t be lower sometime in the next 10 years and you’ll refinance, or you’ll sell. 

  Personally I hate interest only loans but I hate paying interest. I understand it has it uses. Is it all you can afford or does it do something for you a regular loan can’t do at a reasonable cost? If so go ahead. 

[Chris Seveney]

@Arsalan J Khan

Depends also on risk, but what is the rate of the loan and can you invest that money and do better, most likely not because it’s a small amount and it will have taxes on top of it, so I would rather pay the higher amount to build more equity

Like others I hate paying interest

[Nick Belsky]

@Arsalan J Khan

You are referring to what's called a hybrid loan.  There are a few different iterations, but essentially, you have a 40 year fixed rate that is broken up into two parts; the first ten years is interest only, then automatically "converts" to an amortized loan over the next 30 years.  There are a few advantages to this structure, but the real questions are two things; how long to you plan to hold this property?, and is there a Prepayment Penalty on the loan?

If you plan to hold this loan for 30 years, your total interest paid will be way higher compared to a traditional 30 year fixed loan.  If you are hedging the market for a few years to see what happens and plan to refinance if/when rates fall, then it may be a good option to increase your cash flow in the interim.  I am not recommending Prepayment penalties any longer than 3 years right now.  Some of my clients even opt for 1 or 2 year PPP.  If conventional, then PPP is not an issue.

Cheers!

[Arsalan J Khan]

Quote from @Nick Belsky:

@Arsalan J Khan

You are referring to what's called a hybrid loan.  There are a few different iterations, but essentially, you have a 40 year fixed rate that is broken up into two parts; the first ten years is interest only, then automatically "converts" to an amortized loan over the next 30 years.  There are a few advantages to this structure, but the real questions are two things; how long to you plan to hold this property?, and is there a Prepayment Penalty on the loan?

If you plan to hold this loan for 30 years, your total interest paid will be way higher compared to a traditional 30 year fixed loan.  If you are hedging the market for a few years to see what happens and plan to refinance if/when rates fall, then it may be a good option to increase your cash flow in the interim.  I am not recommending Prepayment penalties any longer than 3 years right now.  Some of my clients even opt for 1 or 2 year PPP.  If conventional, then PPP is not an issue.

Cheers!

 3-2-1 prepayment penalty. I had thought I would refinance at the 4 year mark hopefully at lower rate at that point. 

[Zach Wain]

Just a higher interest rate.  If rates drop in 1-2 years and you have a 3 yr PPP you not like the terms anymore...