Interest Only Payments
I have a friend who will be purchasing a sfh, and flipping it within 3 months or so.
He will contract the work out to us and split profits. We will do a tic contract.
Would it be beneficial to do a interest only loan for the purposes of saving monie since the property will be flipped anyway.
How does this work
Interest only loans are great if you only plan on holding for a short time but make sure you know the prepayment terms.
I agree with Maw, also be sure to calculate your profits deducting at least double or triple your anticipated sell date. If you think you can sell in 3 months, calculate 6 or 9 months worth of mortage payments and make sure that doesn't eat too much into your bottom line.
GL
If you're really going to flip you might even want to consider an ARM where the initial teaser rate is very low. Just make sure it doesn't have a pre-payment penalty.
[quote]
On 2004-08-30 12:40, commercialking wrote:
If you're really going to flip you might even want to consider an ARM where the initial teaser rate is very low. Just make sure it doesn't have a pre-payment penalty.
Some are as low as 1.9% for the first six months
Lori
[addsig]
I just used a ARM product which the rate was 1.25% for first 5 years on up to 4 units. It is based on the 1 month LIBOR. The Payment is locked in for 1 year at a time and can only increase a maximum of 7.5% per year. That's not 7.5% APR but 7.5% of the payment (1st year payment of $100/month would max out the 2nd year at $107.5/month and so on). It cut my payments in half on all of my properties.
Hey,
I think you might want to review that ARM, because there is no way those numbers are correct.
Based on what you provided: a five year ARM, based on the MONTHLY LIBOR that only adjusted once a year by NO MORE than 7.5% of the payment.
At the end of five years your payment would max at $133.55 (interest only payment) and that would equate to 1.67% APR.
No way.
Bruce,
You don't understand the program or maybe I didn't explain it enough. The maximum payment could be in the 5th year is $143.5/month based on the starting rate of $100/month. The 1.25% is not the actual APR but the minimum due. It works like an interest only but some of the principal is actually paid also (although not much). The actual APR is based on the LIBOR and varies with the property (primary sfr, second home, investment property, etc.) It is a 30 yr loan from the start so at the end of 30 years your mortgage is paid off. The first 5yrs you have 4 payment options each month. 1) the minimum due which is 1.25% 2) interest only payment 3) 15yr amortization payment or 4) 30yr amortization payment. You have all four of these options each month when it comes payment time. Hope that explains it a little better.
Hey,
I am still not clear on how the 1.25% works. 1.25% of what? The balance on the loan?
Maybe if we used some numbers I would understand better. If the loan balance on month one was $100k, what would the payment be, what would the interest rate be?
.
Bruce,
The 1.25% is the minimum ARM payment rate. The actual APR right now with todays 1month LIBOR is 4.12%. As I said earlier, you have 4 payment options each month: minimum due @ 1.25%, interest only @ the current 4.12, 15yr, or 30yr.
The monthly payments are locked in annually. Assuming the the maximum 7.5% of the payment (not APR) is reached each year, payments would be as follows for the minimum due:
1st Year $333
2nd Year $358
3rd Year $385
4th Year $414
5th Year $445
At the end of the 5yrs, the product turns into a conventional 30 yr with 25 yrs remaining. You also have the option to pay it as a 15yr if you wish. You also have the option to refinance to the product again and start over.
The interest only payment would be $343 which would mean that you are deferring $10 in interest if you only pay the minimum due.
As I'm sure you are aware, the 30yr payment would be $484 and the 15yr would be $746.
Does that help?
Sorry, I forget to mention that is with a balance of 100K.
Hey,
I appreciate you trying to explain this to me, but I am going to raise my hand and say i am stupid...because I still don't understand.
Where does the $333 come from? The only way I can get that number is to take the current APR (4.12%) and SUBTRACT .0125 from it. Is that where the 1.25% comes in to play?
I guess on a wider front, the only advantage I see here is that you lock in the ARM rate at the start of each year instead of each month. Am I missing it?
The only way the rate is 1.25% is if you are living in the property. If it is a rental property the lowest rate would be 1.65%
Lori
[addsig]
I know about these ARM products and they are great, but I wouldn't suggest them for short term. They are based on the LIBOR, but the mortgage payment you make is less than what the actual rate is. This creates negative amortization, or deferred interest, so your principle balance would increase. The banks that offer these give you a choice of how much you want to pay , usually with 1.25% being the lowest.
If you are only going to hold it for, say 6 months, then get an interest only ARM that adjusts every 6 months. This way, even if you go past how long you wanted to hold it, then there are usually caps involved and you would pay less then a regular mortgage. Just make sure there are no pre-payment penalties.
The $333 is based on the 1.25% start rate (the payment is calculated using 1.25% as the APR over 30yrs, but actual APR is 4.12) on 100K.
Yes this is for a primary residence and for investment property up to 4 units would be 1.75%.
And, this product is perfect for short term. Why pay a fixed rate of 6% where the large majority of your payment is interested when you could pay the 1.25% or even the 4.12 interest only? Yes, if you pay the minimum due @ 1.25 you defer $10 in interest each month but compare that with paying $600/month on a conventional 6% 30yr. If you are worried about deferred interest then make the interest only payment for $10 more each month. As I am sure you are aware, of the first 10yrs of payments on a 30yr, only approx. 20% of that is applied to the principal. So if you are looking for the principal reduction, you might as well go with a 15yr.
Many builders who build and live there for 2 yrs for tax reasons use this and it works great.
If you are looking longterm consider this. When you pay down your principal you create equity which gets a return of 0%. Some people might say that their house is appreciating but the house will appreciate no matter how much you owe on it. Why not take that diffence and invest it in more RE or the market where it will at least get some kind of return instead of 0%?
On a primary residence with 100K against it you will pay $600/month @ 6% on 30yr. By paying the minimum due and assuming the payments max out each year for the first 5 yrs you have saved $12,745 if you just put that savings in your savings account each month. If you invest that savings each month and take advantage of compound interest, at a 10% return you have $16,994 at the end of 5 yrs. Let that $16,994 keep compounding at 10% and continue to pay off your mortgage as a 30yr and in 25yrs you have a paid off house and $204,890 in your investment account.
Hey,
Well now I am really starting to feel stupid, because I still do not get it.
$100k / 12 x 1.25% = $104.17 not $333
How do you get $333?
I agree with you sterveen2002 that this is a great product. I have it myself on my own home. However, manman was only asking about having the loan for only 3 months or so. I suppose you could only pay interest only on this loan for those three months, but that would be at the 4% range. If he got a 6 month adjustable, he could get a lower rate and not have any deferred interest. His whole question was about interest only, which in this case I think is the best.
Bruce, don't feel stupid. This type of loan, while not new to the marketplace, is a lot different then what most people are used to. The actual rate on this loan is based on whatever index is used plus a margin (or the banks profit). This case it's based on the one months LIBOR which is extremely low right now. As Stevereen was saying before the actual rate is around 4% or a little higher. The bank only makes you pay as if it were 1.25% for the first year. Then each year after for five years, your payments increase. Because your paying less than what the actual rate is, the interest you haven't paid gets added on to your principle balance. These banks also offer interest only payments. Here's how to figure that out (Loan amount * Interest Rate in decimals). Divide the outcome of that by 360 (days in the year approx.), then times all that by 30 (days in month approx). This gives you what the interest you would pay for that month.
Hey Ernie,
I still don't get it. I even tried using a different calculator, but i get the same answer.
Where is the 1.25% used? Can someone show me the math (using 1.25%)?
Hi Bruce. If you used a mortgage calculator and figured out $100k, at 1.25%, over 30 years, you would get $333.25/month. Interest only would be figured out at what the real interest rate is, let's say 4.25%. Then you would multiply 100k times .0425. Then take that number and divide it by 360. That is what it costs per day in interest for that loan. Then times that by 30 and you would get the interest only payment per month.
FYI~
As of today, the new minimum due rate is 1.00%. This means that investment property is now at 1.5% also. (This includes PMI)
Hey Ernie,
FINALLY!!! Thanks.
I presumed (incorrectly) that the 1.25% was interest only, but it amortized.
BUT, that leads to more questions...
If the payment is $333 and the interest is 1.25%, then are you paying $229 of principal???
Also, I see where the stated difference in interest is accrued. But is the difference $10 ( the difference in the total payment amounts) or $239 (the difference in the interest payments)?
Does anyone know a website I can look at concerning this product?
Thanks again!
Hi Bruce,
You can e-mail me if you like to get a web site. There are a few out there that explains it.
What's basically happening is that you are paying on an amortized rate of 1.25%, but in actuality that is not the real rate. So, since the 1.25% you are paying is less than what the rate is, then all that will be applied towards the interest and you will also have deferred interest. It's another way of paying less on a mortgage payment. The bank basically says you can pay much less so you aren't stuck with a huge monthly mortgage payment, or to use that savings for investing in other things instead of using it for a mortgage payment. Then, each year your payments increase slighly to get you closer to that actual rate without putting you in payment shock.
Hey,
I don't see an e-mail address. :(
I emailed you my email address on your profile. Let me know you got it. I will keep checking.