Interest-Only? 40 Years? Fixed? Extra Extra?
Are you a real estate investor?
Do you consider yourself an ordinary or extraordinary investor?
Have you ever thought about an interest-only loan for your rental property?
I'd be willing to bet that even if the ordinary investor learned of a 40-year fixed interest-only loan, he might initially think right back to the heyday of stated income loans and remind himself that there's no way he'd ever get involved in such risky business. Rest assured that this person doesn't need to change his philosophy. That's not what I'm going to cover here. But I am going to discuss the four ways that I see our exclusive and extraordinary 40-year fixed interest-only investment property mortgage being a loan worth careful consideration, especially if our target audience and property consists of a conservative loan-to-value (60% or less) and strong credit profile (760+).
Let's start with some basics. This loan program has a 40-year total term. Its rate is fixed the entire time. At the beginning of the term and for the first 10 years, the borrower is permitted to make an interest-only payment. There are no prepayment penalties so any amount that the borrower pays above the minimum required interest payment is applied to principal. And remember, NO RATE CHANGES for 40 years. Got it?
Here are the ways I see this investor program being a powerhouse:
- The investor can "defer" principal paydown until rents are higher. When this loan "resets" after the interest-only period, the borrower will have a 30-year fixed rate loan (at today's rates!). But ten years from now, we'd all like to think rents will be higher. So this investor would essentially be paying down a 30-year fixed rate loan with future, higher rents. Think about that for a minute. And if you find the "catch" that all the while and for an additional 10 years this borrower has been paying interest and that over a 40-year term the borrower will certainly pay more cumulative interest, you are correct. However, how has the opportunity to pay less in the first ten years benefited the investor? Has he parlayed today's savings into anything other financial gain?
- The investor has maximized flow but conceded nothing in fixed years. As above, from years one through ten and while rents are lower, this borrower/landlord has benefited from a much lower payment and this can make the difference between cash-flow positive and cash-flow negative.
- Our borrower preserves today’s low rates well into the future, though if rates and rents continue to rise, the benefit grows.
- NOTHING prevents the borrower from prepaying the 40-year loan. In short, this can simply be a 30-year fixed rate loan too. If this investor made a fully-amortized payment from Day 1, there would be no difference between this loan and a standard 30-year fixed loan. So in essence, this program affords an option to make a lower payment and to electively determine a strategy for pay down over time. It gives our investor more flexibility and for those who have an intent to perhaps manage a portfolio of properties, this might be a very appealing feature.
Now you might be saying, "Well, this all sounds pretty good. I'd sure like to see some math on this, Rob." And I'd love to indulge you on that, but I'm afraid the regulators of our industry would be all too happy to jump on my back if I gave you specifics. They'd need me to disclose terms, APR's, etc., and it's just impractical to attempt to do it here, so get in touch any time and I'll be happy to demonstrate mathematically how this loan program would work in your situation. I have done extentsive analysis to demonstrate the points above and they are both compelling and though-provoking.
A pattern I have observed in my career is that the savvy investor never sleeps. He/she is always thinking about ways to make money go farther, do more, and work smarter. Our 40-year fixed interest-only investor loan should be on this person's financial radar because it defies stereotype, provides flexibility with limited risk and lives up to its extraordinary billing.
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