Have you heard about all the bad press about Smart Loans and all the other kinds of loans that contains negative amortization? Much of it is deserved! This loan is a tool and just like any tool, there is a correct way to use it and a wrong way!
Many people that obtain Smart Loans do it just to get a more manageable payment on the house that they live in. They could not afford it using any other kind of financing. They finance the house to the max and suddenly they owe more than what the house is valued at when their loan amount begins to get bigger!
Smart Loans are a good choice when your home is experiencing steady appreciation (5% or more) because this type of mortgage has the ability for negative amortization (the loan balance can actually increase throughout its history). In this situation, the rate of appreciation will simply out pace any increase in the loan balance.
Cash Flow ARMs are good for houses that you are financing under 90% of the value or purchase price. In quickly appreciating housing markets you can get away with a higher amount but leaving a 10% equity cushion in the home is bare minimum. Why? Well, ff you get rid of the home via normal channels, your selling expenses could be anywhere from 9-15% of the sales price! No one enjoys the idea of having to come out of pocket to get rid of a house! You want to earn money!
Real estate investors will discover some of the largest benefits in using Cash Flow ARMs. When you take a house that meets some of the criteria discussed earlier, using pay options will afford you the following:
1. Flexible Payment Structure – Just as the name Pay Option ARM states, you have different payment options. One, you have the payment based on the start interest rate of the loan (which could be as low as 1% or less!). With the second option, you have the interest only payment. Three, There's an option to pay based on a 30 year amortization term. Lastly, the fourth pay option is based on a 15 year term. The last 2 pay options allow you to pay down the loan balance if you want.
2. Increase Monthly Revenue – Cash flow is the main objective when dealing with rental property and cash flow ARMs are one of the best methods to increase it. Used correctly, cash flow ARMs can increase the revenue on you rental by over 100%!
3. Minimize The Cost Of Empty Units - Anyone who owns rental property has had vacancies. If you haven’t yet, just wait you will! One single month of vacancy, property dependent, can just about destroy the profit for an entire year! Don't think so? Go ahead and add up the holding expense for carrying the note, utilites, cleaning, and a little touch up paint and see what you get. If there was a way to reduce the largest expense, the mortgage, by a third, wouldn’t that ease the pain? Again, cash flow ARMs are the way to go!
4. No more worrying about unexpected repairs – In the same regard as the vacancy example, you will be better able to shrug off the effects of an unexpected repair because your cash flow has over doubled.
5. Give incentives to residents for good "behavior" – You can get very creative here. Credit for paying before the beginning of the month (for example, payment by the 25th). Discounts on longer term leases such as an 18-24 month lease, etc. The extra revenue from using a pay option ARM can smooth out you tenant churn and give you ability to assist you with tenant retention, particularly in a renters market!
6. Leverage the house to consolidate personal debt – If your earnings from obtaining a cash flow ARM goes from $250 to $500 a month, you can utilize that extra money to consolidate your car, credit cards, student loans, whatever.
7. Save the extra income to buy more property! – Better yet, start saving that extra cash flow to buy more property! You will use pay option arms, collect more cash flow and use that to buy even more property! Then your business feeds off of itself without you having to use your salary for your 9 to 5 to fund it!
Article Source: http://www.orbitaloc.com/
About the Author: Fred Hopkins is an 8 year mortgage industry veteran and a investment property owner. He specializes in bad credit home loans and 95% and 100% investor loans. To sign up for his FREE Investor Financing Newsletter go to www.mountaintopmtg.net/investorloans.
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