Mortgages For Real Estate Investments (cont)
Adjustable Rate Mortgage
Adjustable rate mortgage loans, or ARMs, as they are commonly known as, are almost as popular as fixed rate mortgages. Real estate investors are known for using these as well. If you decide on this loan, you can be assured of having a variable interest rate.
A variable interest rate is the rate that lenders charge and it often fluctuates. The rates change in accordance with the increase or decrease of interest rates in the market during that time.
It would start off with a fixed rate for a few years. Then it would go into a variable period. This means that after the fixed rate period is over, your loan rate (and monthly payment) is subject to adjusting every year.
With that, the majority of ARMs have a stopping point of how much they can change. With this loan, the rate can increase or decrease to a certain amount as long as you have it.
In the beginning, this kind of loan may include a low rate of interest. For some real estate investors, this would work for them because they may not want to hold on to the property for an extended time.
Also, when the interest rates decrease, investors can grab at the chance to get in on them. On the other hand, this loan is very risky. When interest rates increase, the investor will have to go with the flow.
The bad thing about this is, they will not know in advance when the rates will increase. In reality, ARMs can be an unsure thing because you don’t know how much money you will continue to pay due to the constant fluctuations.
Interest-Only Loans
Another loan that is good for real estate investors in the interest-only mortgage loan. Investors can use this loan when they are having a hard time with getting positive cash flow. This usually happens when the value of the property has increased.
Some investors normally get interest-only loans if they don’t want negative cash flow, if they want to use the cash for something else, or if they’re thinking about getting into property flipping for a future date.
When an investor has this kind of mortgage loan, they can hold off on principal payments for a certain period of time. It is usually no more than ten years, but could be less than that. The investor is only paying the interest and nothing else during this period.
In order to get rid of the principal in the future, the loan is amortized again after the period of only paying the interest has ended. The investor ends up paying a higher mortgage loan payment. There are several ways that the investor can handle this situation: sell their property, stick with the higher payment or try to refinance.
Balloon Mortgage
Having a balloon mortgage is not one of the popular kinds of mortgage loans, but real estate investors have used them. This mortgage increases using a longer time than the actual mortgage term. The investor ends up with a smaller payment.
However, at the term’s end, there will be a balance that the investor has to pay in full or refinance the loan. If the investor can’t pay the lump sum in full or get refinancing, they will end up selling the property.
Even though there is an advantage for smaller mortgage payments in the beginning, at the end, the investor can come out as the loser if they can’t pay off the entire balance or refinance. Plus, with refinancing, the investor will have to deal with an interest rate increase, plus refinancing costs. That’s just more money coming out of their pocket than necessary.