REI friendly mortgages

[elnuk]

Hello again everone.

I am trying to find out what kind of loan can be used to maximum cash flow from REI, and also what financing companies with operations in the south east are investor friendly.

I know there are a lot of loan programs out there especially with the boom in REI, but now i hear about negative armortization and i am trying to avoid pitfalls.

Thanks for any and all information. :SM110:

[DionEvalueMortgage]

Negative Amorization loans are, from what I see, the most widely abused loans when it comes to advertisement. For the obvious reasons they attract the public, 1.0% start rates (or slightly higher depending on lender) which means low monthly payments ($100,000 @ 1% = $322 a month). These rates are always slightly higher for NOO (Non Owner Occupied) properties.

Let's understand the loan in easy terms. The loan has a payment rate of 1%, not to be confused with an interest rate. The interest rate on this loan may be (depending on market conditions) 5.0%. So that means we have a MINIMUMN Payment which will NOT cover all of the Interest for the payment. 5.0% interest rate = $417 Interest Only. When you make the MIN. payment at $322 you deffer $95 to the "back" or principle amount of the loan. So after 12 months of making the minimumn payment you will OWE an extra $1,140.00. Each month with these programs you have the option to make the minimumn payment or an interest only payment or a Fully Index payment which may be based on 30 years or 15 years.

So the next thing to know is that the actual interest rate in these programs is a varible. The interest rate is composed of an INDEX plus a MARGIN. Now for our teaching sake the INDEX is all we will concern ourselves with. The index is the market security or bond that the lender uses to base the loan on to basicly make sure they make money. These indexes include LIBOR, COFI, COSI, T-Bill and some others. While these are some what stable indexes they still go up and down all the time. So this means now your TRUE interest rate in month 1 might be 5.0% be in the next 5.25%. Keep in mind the programs don't ride the rollar coaster too bad from month to month.

Now the next thing to know is these programs have payment and rate caps just like all ARMS. Usually a payment cap of around 7.5% and a life time cap of 10-12%. So your payment rate of 1.0% will be used to caluculate your first 12 months payment and then you payment can adjust plus or minus 7.5% of itself or go up or down $24 in months 13 through 24. This cycle continues for upto 5 years or your defferment reaches a maximumn of 110% of the orginal loan. The loan adjusts to amoritize over the remain amount of years to 30.

So now comes the when is this loan a good idea? Well when you are smart enough to understand it and utilize the money you deffer wisely. Whether this be through property appriciation or through cash investment stratagies that produce the wonder full ROI. Some of the perks of using this loan include leverage the property against a short term sale. For instance, I know I am going to flip this property in 12 months after remodel. Well then why pay the extra $95 to the bank each month? Keep the money in your bank. Or another is refi to improve property before a sale.

These loans can be good for borrowers who have peaks and valleys in their income and understand what they are getting into because the loan actually moves with the market better than most other products. Or if the family or indivual was in need of a finacial resturcture for a couple of years say using the loan to support the onset of a new baby for 3 years.

Most of the benefit of these loans are used up by the conclusion of 3 years and the benefit starts to wash itself out against other programs like 5/1 ARMS or Fixed rate programs.

So there is the basic idea....don't get me wrong, I am a big fan of this loan. It has many uses! In the market it is just miss sold and miss understood. So post your new questions and I will be back to respond!

:SM086: :praise: :SM013:

[Dan Auito]

Questions? I think that is pretty darn clear there Dion. Beautiful explanation and some wise insights to boot. Thanks for laying that down! :smile:

[elnuk]

Could not have said it better. Thanks Dion, your depth of knowledge is admirable. :praise:

I do however have one question, Washinton Mutual has a loan that allows you to pay one of four ways - Minimum, interest only, 15yr, or 30 year. Would this be a good idea with the view of paying interest only for a couple of years and then at the 30 year rate? I plan to hold this property as a rental for 5 to 7 years.

[Dan Auito]

Looks like Dions out at the moment Elnuk. Today’s investors seem to be sacrificing equity accrual for fast cash and profit by going interest only while they count on appreciation to do the rest! Granted they never pay the principle but what do they care if they are going to sell in a span of 3-5 years riding the appreciation cycle up and cashing out the original mortgage amount. That's getting riskier to do now that pricing in many areas is beginning to top out.

The old method of taking out the 30 year amortizing note & Mortgage forces you to watch your numbers and buy right while at the same time paying down the principle, a 15yr does the same thing but forces you to make room for a little higher monthly payment but at 15 years you're free and clear.

When you talk to the really wealthy people in this biz, you often find that they bought real estate many moons ago and still have it, that's the secret here, slow and steady accumulation while holding what you've got!

Flip the ones you need to in order to have the money to acquire the long term keepers! Acquire and hold one more house a year for twenty years and you can retire in twenty years as a bonified multi-millionaire, not many have the stomach to hold out on that road but for those who do, well they make vacation packages and Cadillac escalades for those folks!

[DionEvalueMortgage]

Could not have said it better. Thanks Dion, your depth of knowledge is admirable. :praise:

I do however have one question, Washinton Mutual has a loan that allows you to pay one of four ways - Minimum, interest only, 15yr, or 30 year. Would this be a good idea with the view of paying interest only for a couple of years and then at the 30 year rate? I plan to hold this property as a rental for 5 to 7 years.


The WAMU loan is a neg am loan. The neg am loan does allow you to pay at a smaller "real" interest rate. Most of the indexes are below 3% and most margins are 3% or lower. The problem that Dan also pointed out from the real estate side is time line in the market.

If you are going to sit in this property for 5 or 7 years then why not just take that 5 year ARM. It's safe, the interest rate will be relative to the real interest rate of the negative amoritization loan and you can take an interest only option on it if you want. Now I am not exactly on the same page with your reference to the 30 year rate. I think you mean pay interest only for a couple of years and then refinance?

As Dan stated and I commend him on it, the name of the game is "hold 'em" just like celebraty poker. If your going to hold the property then I would run the numbers on your rent roll and see what puts you in the black. Investment statagies can manipulate 30 year fixed and 15 year fixed rate mortgages if you can show enough black to add some extra money each month.

With all of these new and innovative products people have started shopping for the wrong thing. They shop for the name of a product instead of what the product does. This has caused many common misunderstandings in our industry. For example, INTEREST ONLY, people commonly associate Interest Only as some specific loan...couldn't be further from the truth. Interst Only is a FUNCTION of a loan the Interest rate of the ARM they recieved is why the payment is so low. You can get interest only on some FIXED RATE mortgages. Interest Only saves you perspectively about $100 on $100,000.

So, to answer your question finally. Ask yourself, what is the end goal of the property? Flip in 5 years or hold it? IF it's flip get an ARM, explore the interest only option with your rent roll and debt service. If it's hold longer than that 5 years then just get a fixed rate and see if you can contribute an extra $100 each month above your payment. If you wanted to flip the property inside of 3 years then I would explore the neg am loan.

Did that answer your question? :beer: