Interest Only Payments?

Question

When you are looking to refinance in a Brrrr deal, are you primarily/ideally looking for a refinance that offers interest only payments for the first bit? I find it hard to make the numbers work unless I find that kind of a deal. Is it hard to find a lender that does that? I spoke with Wells Fargo and they said they would not do interest only payments at all. Looking for as much information as possible on the Refinance part of Brrrr. If you have a book recommendation on that particular topic or any advice I would love it! Thank you!

Przemek Kos · Answer

@Francesca Perez I believe this is incorrect. ARM mortgages are principal and interest regardless of whether you are in the first (fixed) portion or later (adjustable) - ARM is not a IO product.

Kyleigh Morgan · Answer

Thanks you guys! That helps guide me a lot. I’m going to focus on factoring in P&I when I’m analyzing properties from now on.

Zoran Stanoev · Answer

@Kyleigh Morgan have you read David Greene's book on BRRRR?  I think it does an excellent job of explaining the entire process and what to expect at every turn. Good luck!

Brady Morgan · Answer

I will add my two cents here, as this is something I have been looking at myself.

To start with, if you can’t make a deal work with traditional financing then please stay out of the deal until you are Moreno experienced. That I should probably my number one advice on the topic. If you are having a hard time finding good deals, then try a different market perhaps? Texas has some great market for example.

To go into more detail, I will explain what options I have found and how I intend to use them. My investing strategy is essentially the basic brrrr. I buy a house that needs rehab with hard money, then refinance. However I am currently looking into refinancing with what is called a portfolio loan (balance sheet, not blanket). This is because my parter, who is providing the capital, is retired and has no income but a lot of asset accounts. So the portfolio loan allows us to qualify based on assets rather than income. This also means we can buy in an LLC which we preferred for our particular strategy. The portfolio loans do come with a slightly higher interest rate, currently around 6%, but have flexibility in areas such as interest only periods. For example, one of my hard money lenders also offers portfolio lending for the refinance at a 6% rate which can include up to 5 years IO with a prepay penalty of 5% in year 1 and 1% less each year until year 5 when it becomes a standard loan essentially.

So the question is then, when does it make sense to use the IO option? For me this is a matter of strategy. In my current deals we are focusing on building up cash flow to reinvest as quickly as possible over the next few years. According to my modeling that will provide the best 10 yr return on investment and meet the goals of my parter and I both. So we are using the interest only option on deals that make sense for it, getting a nice boost to cash flow, while keeping in mind that our return on sale when we sell in five years as planned will be much lower with none of the principal having been paid down. Because we will be 1031 exchanging into a new property to basically reset tax liability and enter a new IO loan rather than banking on a big profit at sale, this works for us.

So to sum it up, financing doesn’t necessarily make or break the deal, it’s more of a strategic choice. If the deal doesn’t make sense with conventional lending options after the hard money for rehab, then I would recommend moving on to a different deal rather than trying to make it work with creative financing. Hope this helps anyone out there curios about the topic.

Francesca Perez · Answer

@Przemek Kos

What is an Interest-Only ARM

An interest-only adjustable-rate mortgage (ARM) is a type of mortgage loan in which the borrower is only required to pay the interest owed each month, for a certain period of time. During the interest-only period, only interest accrued each period must be paid, and a borrower is not required to pay down any principal owed. The length of the interest-only period varies from mortgage to mortgage, but can last anywhere from a few months to many years.

After the interest-only period, the mortgage must amortize so that the mortgage will be paid off by the end of its original term. This means that monthly payments must increase substantially after the initial interest-only period lapses. Interest-only ARMs also have floating interest rates, meaning that the interest payment owed each month changes in market conditions.

You can read the rest on here: https://www.investopedia.com/terms/i/interestonlyarm.asp

Kerry Baird · Answer

Interest-only mortgages serve for investor use. Since Dodd-Frank regulations have intended that the general public don’t get financially hurt in the same way as in the last boom/bust IO loans aren’t readily available. You can find them in some non-qm lending, some portfolio, and IO is typical for hard money loans.

Craig Jeppesen · Answer

I would not do an interest only loan on a long term refinance. If you want to use an interest only heloc to purchase or rehab the property that is ok. Stick to the numbers for a brrr. If the numbers don’t work the price is too high. Offer less or move on to the next deal.

Kyleigh Morgan · Answer

@Francesca Perez thank you so much for all that advice! That really helped me understand things a lot better!

Francesca Perez · Answer

If you are looking for interest only loans then you need to find lenders that offer what is called an ARM loan (adjustable rate mortgage). There are several different types available, such as a 5/1 which tends to be the most common, 7/1, or a 10/1. Depending on which you choose you would be paying interest only for the first leg of it the 5, 7, or 10 years at a fixed rate. Then there after your rate is subject to the martket, making it variable.  They do have caps on the rate, so your payment doesnt quadruple in the next month but these caps are annual so they will continue adjust.  Understand that if you go that route, although your payment is lower, you will have not paid down any of the principle balance.  So while it may seem lucrative to jump in, you should try to have a better understanding of the loan so that you don't get in a position where you have been paying interest payments for 10 years and still owe the full purchase price.  Try to have an exit strategy so you can see if this type of loan will work for you.

Good luck :)

Wayne Brooks · Answer

No, it is very uncommon.

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