In most cases, a professional real estate expert recommends that real estate investors get interest-only mortgages. Interest-only mortgages offer some unique advantages compared to standard capital repayment mortgages. It is time to clarify all myths about taking a loan on an interest-only basis. Today’s article will help you understand what an interest-only mortgage entails and how you can tell if it’s the right choice.
Capital Repayment vs. Interest-Only Mortgages
Most real estate investors are already familiar with repayment mortgages. Whenever you take out a repayment mortgage, you promise to make regular monthly payments that will cover the interest rate on your loan. And help you repay the capital you borrowed in steady installments. You will make these repayments through the term of your mortgage, so towards the end, you own your commercial property.
However, with an interest-only mortgage, you are merely renting the capital you need for the total duration of your investment. Here, the rent would be the interest you pay your real estate lender every month. Towards the end of your term, you will still owe your lender the original amount you borrowed. Unless you have already made occasional lump-sum repayments during your mortgage.
Interest-Only Mortgages And Their Repayment Plans
If you wish to qualify for an interest-only mortgage, you must present a repayment plan for the amount you borrow to your potential interest-only mortgage lender. It can include savings, a pension payout, an endowment policy that you can cash in, or any other investments.
Though you may plan on reselling the property to pay your mortgage. You must prove you can repay the loan even if you wish to retain complete real estate ownership towards the end of your mortgage term. It also ensures the lender that you can still repay the mortgage even if you cannot earn enough upon selling the property.
Why Would We Recommend Interest-Only Mortgages?
We recommend that many of our investors go for an interest-only mortgage because of the cash flow and flexibility they offer. With low monthly payments, you will keep most of your monthly rental income. You can either save all this extra income to make a significant repayment on your mortgage. Or reinvest it to grow your investment portfolio. So much flexibility can be beneficial throughout your investment term. For instance, your rental real estate stays vacant for a few months or requires unexpected repairs. A lower monthly payment means your overall cash flow will not suffer a significant blow.
You can sell the rental property to repay your mortgage and continue your next real estate investment. Moreover, towards the end of your interest-only mortgage term, you could always pay the capital you borrowed to own the property entirely. All these things make interest-only mortgages ideal for real estate investors. Since owning a rental property for decades is generally not their primary goal.
Many people fear interest-only mortgages because they fear real estate prices will fall over the years. However, it would help if you also remembered that it is implausible to happen over a 25-year period which is also the standard term for interest-only mortgages.
Which One Is The Right For You?
With everything said, there is nothing wrong with regular mortgages, and they might work well for certain types of real estate investors. Especially if you are old and would prefer to leave a mortgage-free real estate in your family will. Repayment mortgages would be a better choice for you. It is also a good choice if your primary goal is capital growth and you are a risk-averse person.
In most instances, interest-only mortgages are not the best option for residential properties since the associated risks are much higher. Especially if the real estate is to be your primary residence. It is true, especially if you plan to move to another property towards the end of your term. Because you will have to find enough capital to purchase a suitable new house and pay off your remaining mortgage.
However, suppose your primary income is made up of significant periodic lump sums from things like commissions and bonuses. In that case, the flexibility that interest-only mortgages provide might be just what you need.
Even if you are a real estate investor focusing on generating a steady income from your rental real estate, taking an interest-only mortgage is one of your best options. It will give you access to superior cash flow and the flexibility you need to maintain and expand your investment portfolio.
Are You Looking For An Interest-Only Mortgage? Contact Real Estate Funding Solutions Today!
Our Real Estate Funding Solutions experts have to spend years learning the ins and outs of the investment industry. We understand all lending rules and can help you find the best and most appropriate lending option that enables you to achieve your long-term or short-term investment goals. Contact our experts at 855-913-8637 for more information.