Interest only mortgages

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I'm about to put an offer in for a condo, which will be used as a rental property. If I do this, I'm going with a 10-year fixed interest-only. It's a 30 year loan, but the interest only portion is 10 years.

I hear the possible horror stories that can happen, and I know people take out shorter term interest-only(it's interest only for 3, 5, years), and then can't afford the hike in mortgage payments.

But is it that bad of a move when it's interest-only for 10 years?

By the way, it's priced very aggresively, and should produce positive cash flow once fully rented. It's a townhouse with a huge finished basement with it's own private entrance. Easily converted into two apartments.

Anyone have any insight from experience?

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You say the deal will be in a positive cashflow position - cool. However, have you run your projection far enough forward to see what will happen when the interest-only period expires an principal payments come into the picture? If you don't intend to hold the property that long, thats not much of a factor - but if you're still on the hook when payment #121 rolls around, its gonna be a real noticeable factor.

On the other hand, if you're in a position to do so comfortably, a little every month specifically to be credited against the principal - if the lender permits it - will whittle away at the outstanding balance. With interest only, your equity at any point pretty much will be whatever your down payment was plus whatever increase in value as may be due to the housing market - if any. That could have a negative impact on your liquidity and on your ability to leverage other debt.

I'm not saying don't do it, I'm just suggesting you think it through, and leave yourself some "worst case" cushion.

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No experience, but it would scare me so badly I couldn't sleep at night, especially in a market most would consider badly overpriced. You could end up with negative equity real fast, and I'm not sure your lender would tolerate such a situation. In a similar vein, if it comes to a readjustment in housing costs, rents could also decline to the point where cash flow is not a positive number.

Some of the answer comes down to a matter of personality, then.

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Dont forget tax on income, yearly insurance payments, public liability and house insurance, local taxes, management/agent fees and all the other 101 things we tend not to look at.

Check on maintenance history (if any) and set aside an amount for maintenace each year.

Factor in an un-tenneted portion ie that space that happens when tennants move out and quality new tennants are found, sometimes this can be a few weeks or even months.

I am guessing you have already taken these into account cause I know you aint a silly man, but we all tend to get a little excited when a deal is coming together.

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hmmm...my first reaction, like roger is Shocked

but, if your not keeping it for 10 years, you would not only have the income, but be able to write off expenses.

I don't know, can you deduct interest and taxes off a property you're not living in? I would think some way you'd end up deducting it.

When I rented my house out for a couple years, I was always able to find enough expenses to basically write of any profit. Mostly through claiming depreciation.

anyway, what are you plans...keeping it for more than 10 years or not?

Also, I'm sure you've heard landlord nightmare stories, from the enormous to the absurd.

I'm assuming the condo will be local? I had the problem that I was 1000 miles away, and my tenant would deduct from the rent and provide receipts for repairs around the house. The thing is, she would call in an electrician to change a light bulb.

No, not really of course, but one time she called me to tell me she was going to have to call someone in because of something wrong with a light fixture, and the estimate was well over $100....I told her to wait because I was traveling out there anyway the very next week.

When I got there, it was basically a loose screw in the fixture, which I climbed up and fixed myself in 2 minutes. Rolling Eyes

I remember asking her what made her think something like that was worth paying over a hundred dollars for? duh.....

ok, I'm blathering...sorry...

anyway, what's your plans for keeping the place long term?
Are you sure you'd be able to keep it occupied?
Would you be able to sell it when you want to?

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To be honest, I really hate the idea of interest only mortgages. Best case, they end up costing the borrower a whole lot more than conventional mortgages. Pretty much what happens is in your case, you will be paying only interest for 10 years, so at the end of 10 years you do not own any more of the home than when you originally purchased it for. So, for instance, if you got a mortgage today for $300,000; your still have a loan for $300,000 at the end of 10 years. Bascially for those 10 years you have paid rent. The other downside is if home values fall significantly - since you are not paying principle, your home could be valued less than your mortgage balance so you cannot sell (unless you can foot the difference).

Worst case - is you can't afford the payments when you need to start paying principle - which I would think is less likely to be an issue as I would hope in 10 years your salary has increased enough to pay this difference.

The only way I can imagine it working well is if you get a lower interest rate on the mortgage than a conventional mortgage AND you pay extra (make sure there is no penalty for this) each month so that you are paying off a portion of the principle - that way when 10 years pass, your mortgage has gone down and you end up paying less in the long run.

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If it's not your primary residence, and you plan to generat cash from it for the next 10 years, I think you're in a good position. It's not likely, despite reports of a housing bubble bust, that the property will not appreciate in 10 years time. You can refinance or sell at that time. In the mean time, you will be generating positive cash flow that you might get with a conventional mortgage.

If it was your own residence I would advise against it, but for an investment, I think it's fine.

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Just make sure there is no prepayment penalty.

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FreeDuck wrote:

If it's not your primary residence, and you plan to generat cash from it for the next 10 years, I think you're in a good position. It's not likely, despite reports of a housing bubble bust, that the property will not appreciate in 10 years time. You can refinance or sell at that time. In the mean time, you will be generating positive cash flow that you might get with a conventional mortgage.

If it was your own residence I would advise against it, but for an investment, I think it's fine.

I agree about the 10 year thingy - but was more concerned if he wanted to sell for some reason earlier - maybe couldn't get good renters - had another reason for getting rid of the debt or any other multiple reasons - 10 years is a long time and if values start falling and you something changes where you want to sell you may not be able to.

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I recall that interest, property taxes, and depreciation are deductable for a business (rental) property. Even expenses can be deducted.

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roger wrote:

I recall that interest, property taxes, and depreciation are deductable for a business (rental) property. Even expenses can be deducted.

uh huh, I used to deduct travel going there, phone and all the above.

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I'm PLANNING on keeping it long-term, and would like to sporadically buy additional properties, especially in a down market. Since I absolutely suck at saving money, and retirement is getting tougher, this is my best way. For example, I'd be paying about $20-23K more for this place than I did my current. Except it's 80 years newer, a townhouse vs. a floor of a multi-family, with off-street parking, which I don't have right now. My guess is a year ago it would have been priced, and could have sold for a good chunk more.

Even in a declining housing market, 10 years is a long time. And even longer-term, real estate is almost a guaranteed return.

I figure I could do interest-only and refinance at some point before the end of the 10 years. Currently, I have an interest-only and pay a few hundred extra every month to knock down the principle. Depending on what my rent income is vs. mortage & expenses, I could do the same for the new place.

I'm looking at this from a basic level: 1) immediate break even or positive cash flow, 2) buying in a slow market, which means I'm not paying an inflated price, and 3) real estate is one of the best investments you can make. I think one reason people don't do things like this is because they let all the "what if's" scare them, while the people who have done well with it take calculated risks.

Thanks for the input.

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Slappy Doo Hoo wrote:

I'm PLANNING on keeping it long-term, and would like to sporadically buy additional properties, especially in a down market. Since I absolutely suck at saving money, and retirement is getting tougher, this is my best way. For example, I'd be paying about $20-23K more for this place than I did my current. Except it's 80 years newer, a townhouse vs. a floor of a multi-family, with off-street parking, which I don't have right now. My guess is a year ago it would have been priced, and could have sold for a good chunk more.

Even in a declining housing market, 10 years is a long time. And even longer-term, real estate is almost a guaranteed return.

I figure I could do interest-only and refinance at some point before the end of the 10 years. Currently, I have an interest-only and pay a few hundred extra every month to knock down the principle. Depending on what my rent income is vs. mortage & expenses, I could do the same for the new place.

I'm looking at this from a basic level: 1) immediate break even or positive cash flow, 2) buying in a slow market, which means I'm not paying an inflated price, and 3) real estate is one of the best investments you can make. I think one reason people don't do things like this is because they let all the "what if's" scare them, while the people who have done well with it take calculated risks.

Thanks for the input.

Actually I think the "what ifs" is what you need to look at in order to make the calculated risks. It doesn't prevent you for investing - it prepares you. Without asking those questions, you don't know what the risks are - you need to be informed - that means looking at the negative potentional as well as the positive. If the positives win out and the negatives aren't enough to keep you away from it - then you calculated out your risks - you know what you are getting yourself into in a sense.

We did the same when investing in a business.

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The more calculating you do, the less risk you face. Know what MIGHT happen, how it will affect your position, and plan for those contingencies ... if the contingencies don't materialize, you're out nothing but a bit of time and effort. If they do pop up, you're ready to deal with them effectively, and you're ahead in terms of time, expense, effort, and anguish.

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One thing I note...that's great you're throwing a few hundred at the principal of your current home....you've owned it less than a year, right?

Your principal on the amortization table is only a few bucks a month, you're really getting ahead on it.

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I've owned it a year and a couple months. Although for about 6 months I was only paying the balance, since my payment hiked up $600-700 a month because a screw up with tax calculations, which is now fixed.

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Offer got rejected. Bastard.

There's another condo across the street from it, that's been on the market for over 400 days. 2300+ sq feet, 3 bedrooms on the main floor with granite counters/stainless appliances, refinished floors, nice bathroom. Has a 2nd level suite with full bath, about 700-800 sq feet...could kind of turn that into a seperate 1br apartment...thinking about putting a lowball offer in there. Should be able to about break even on rent vs. mortgage.

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Why's it been on the market so long?

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To understand the valuation, Chai, you might look at the neighbors - like across the street.

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I'm first thinking there's too many problems with the house to bother with.

If it was just priced to high, you'd of thought the owners would have brought the price down by this time.

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Interest only mortgages

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