Is this loan product a good idea?

Question

Hello - I was approach by one of my lenders with a new product. It is a 40 year fixed rate loan with the first 10 years interest only and then it turns into a traditional 30 year amortized loan. The idea behind this is to still have cash flow in the first few years while rents catch up and then by the time the 30 year loan starts you are in a good spot. I would love to hear the community’s thoughts on this! Thanks!

Alan Lacey · Answer

Many time the rate adjustment for those programs offsets most of the payment reduction from going interest only. Just have to compare. Other than that there is nothing wrong with the product.

Andrew Rader · Answer

Hi Bob. Thanks for the response. I see your point here but I would argue that a lower monthly mortgage leads to higher returns and ability to invest that money elsewhere.

Bob E. · Answer

@Andrew Rader  I personally believe 30 year loans are for suckers.  As for 40 years, don't even mention it.

Look at the amortization for that loan an I bet you will find that after 20 years you will have paid off a whipping %15 of the balance.  Part of the game to build equity is amortizing your loan.  If your purchase can't do that you are reaching for a deal that is broken.  We are about to enter a recession and the fed is raising rates.  If you need to get out of that deal and things have not appreciated your will be in a world of hurt.

Chris Seveney · Answer

@Andrew Rader

Curious what type of rates they have on those types of products?

Dustin Rosenberg · Answer

40 year interest only is usually only offered on a DSCR product where the rates are the same as a 30 year fully amortized.. but yes you would need to pay usually an extra point in discount points to get the same rate. It isn't for your typical homeowner, but for investors just another tool that every investor should at least know about.

Dustin Rosenberg · Answer

One of my favorite products on the market right now. It's honestly a no-brainer if you ask me. I know a lot of people taking advantage of this product right now.

Is this loan product a good idea?

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