Interest only loans?

Question

Does anyone have any experience with interest only loans for home purchase?

Brady Morgan · Answer

I posted this in part of a response to another thread, however it is relevant here so I will repeat the relevant portion

I will explain what options I have found and how I intend to use them. My investing strategy is essentially the basic brrrr. I buy a house that needs rehab with hard money, then refinance. However I am currently looking into refinancing with what is called a portfolio loan (balance sheet, not blanket). This is because my parter, who is providing the capital, is retired and has no income but a lot of asset accounts. So the portfolio loan allows us to qualify based on assets rather than income. This also means we can buy in an LLC which we preferred for our particular strategy. The portfolio loans do come with a slightly higher interest rate, currently around 6%, but have flexibility in areas such as interest only periods. For example, one of my hard money lenders also offers portfolio lending for the refinance at a 6% rate which can include up to 5 years IO with a prepay penalty of 5% in year 1 and 1% less each year until year 5 when it becomes a standard loan essentially.

So the question is then, when does it make sense to use the IO option? For me this is a matter of strategy. In my current deals we are focusing on building up cash flow to reinvest as quickly as possible over the next few years. According to my modeling that will provide the best 10 yr return on investment and meet the goals of my parter and I both. So we are using the interest only option on deals that make sense for it, getting a nice boost to cash flow, while keeping in mind that our return on sale when we sell in five years as planned will be much lower with none of the principal having been paid down. Because we will be 1031 exchanging into a new property to basically reset tax liability and enter a new IO loan rather than banking on a big profit at sale, this works for us. Because of the time value of money, we prefer to get bigger returns now in exchange for less in 5 years.

This is just one example of the many IO loans and credit out there, but it’s one that I think can be useful with the brrrr strategy when used wisely.

Tarik Turner · Answer

some lenders actually have long term interest only products as well

Mark Durham · Answer

Sure. That's how HM loans usually work. Nothing wrong with it, just know what you're getting into & be sure to factor that into your calculations.

Jayson Cain · Answer

@Andrew Ralston - I've used IO loans for my own portfolio and also recommend them to some of my clients where appropriate.

An interest-only mortgage is a type of loan where you only pay the interest portion for a certain period, usually around 5 to 10 years. During this time, your monthly payments will be lower compared to a traditional mortgage because you're not paying down the principal balance.

Here are a few things to consider:

• Lower Monthly Payments: With an interest-only mortgage, your initial payments will be more affordable, allowing you to have extra cash on hand for other things.
• Potential Tax Advantages: Depending on your situation, you might be eligible for tax benefits related to mortgage interest deductions. It's always a good idea to consult with a tax professional for personalized advice.

However, it's important to be aware of the risks:

• No Equity Build-up: Since you're not paying down the principal balance during the interest-only period, your home equity won't increase during that time.
• Future Payment Increase: After the interest-only period ends, your monthly payments will likely go up significantly because you'll start paying both the principal and interest.

Some alternative loan options:

• Conventional Fixed-Rate Mortgage: This type of mortgage offers stability with consistent principal and interest payments over the loan term. It allows you to steadily build equity in your home.
• Adjustable-Rate Mortgage (ARM): An ARM has an initial fixed-rate period, usually 5 or 7 years, followed by an adjustable interest rate. If you plan to sell or refinance before the adjustment period begins, an ARM could be an option to consider.

I hope this explanation helps you understand interest-only mortgages and the alternatives available.

If you have any further questions, feel free to reach out.

Joseph Firmin · Answer

Not loans, lines of credit, one is a personal line of credit not backed by collateral, the other is backed by your residence.

Andrew Ralston · Answer

@Joseph Firmin What is the difference between those loans?

Joseph Firmin · Answer

@Andrew Ralston, PLOCs, yes, HELOCs, no, my business partner has that experience. He took out an interest only HELOC and was able to purchase his first 3 properties with that HELOC.

Andrew Ralston · Answer

@Joseph Firmin Do you have any experience with these? What are the pros and cons?

Joseph Firmin · Answer

Hi @Andrew Ralston, sometimes you can get lines of credit that are interest-only payments. Some lenders offer interest-only HELOCs for example.

Interest only loans?

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