Saturday, March 05, 2005

Interest Only Mortgages

I read this post regarding interest only loans at
At Mortgage Matters he posts:

"...About a book called "Missed Fortune 101: A Starter Kit for Becoming a Millionaire," by Douglas R. Andrew. I haven't read it yet, but from glancing at it, it appears that Andrew is suggesting that people get zero-down, interest-only mortgages so they can free up money for investments. He preaches that "equity has no rate of return when it sits idly in the house."

"My mortgage broker friend believes that Andrew's message is catching on, and that a lot of homeowners will want to get interest-only mortgages and transform as much of their equity as possible into liquid investments. I am skeptical of the wisdom of treating one's home primarily as an investment vehicle and secondarily as shelter. I have the book and I'll read it."

I have several investment properties myself. But I think a bit different. I do long term investing meaning I don't flip my properties. I put at least 10% down sometimes 20%. This enables me to get the lowest possible payment when I rent out the home I get the highest rent possible. So for instance, I bought a $70,000 home (now worth $125,000) interest only, 20% down. My payments with taxes and insurance are around $400 a month. I get $750 a month income. That is $350 a month. You are correct in saying I am not paying down the loan which is fine with me. The income I am receiving off my initial investment of $14,000. $350 x 12 = $4200 minus a vacancy rate of 10% (that's high) That gives me $3780 a year. Basically I have recouped my down payment in 4 years and gained equity by the market appreciation.

Further... If I do not "need" the $350 a month income to live on and put the Entire $3780 at the end of the year towards the mortgage I could have the home paid in full in 10-15 years. See the loan is interest only. If I send $3780 towards the principle this reduces my loan balance which in turn reduces my monthly payment which in turns increase the amount I get from the rent (with out charging more). The bank wants me to stay on a 30 year mortgage so they re-adjust everything, they don't want me to pay it off. I know it is confusing...but it makes sense.

There are flex saver loans that are interest only, line of credit on your first. Meaning if I pay down the original balance I actually have checks that I can write against the equity in the house based on the original balance. I never have to apply for a line of credit I am given it basically at closing. Plus I can put down 10% and pay no PMI. And the payment due date is the 15th of the month not the 1st of the month like a standard mortgage. For investment properties that is great...Tenants do not always pay on time.

When looking at getting a mortgage do some research. Ok, do a lot of research. There are TONS of different loan programs out there.

I plan on buying the book. I enjoy this stuff!


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