Tag Archive for: amortized loan

How Interest Payments Work in Real Estate

Today we are going to discuss how interest payments work in real estate. There are a lot of moving parts that you need to take into consideration when purchasing a property. Don’t run the risk of missing deals and missing transactions! Here at The Cash Flow Company we want to guide you through the process to ensure that you have what you need to be successful.

How does interest work?

In regards to mortgages, the biggest question is when is the interest paid when you make a payment? During closing the lender will be asking for a certain amount of interest that is collected arrears. For example, when you are making a July 1st payment, you are paying the interest for the month of June. Whether it’s amortized or interest only, lenders will collect the interest after it’s due. To clarify, the interest payment is arrears while the payment on the property is in advance.  

Interest only loans.

Interest only loans include short term loans, bridge loans, as well as fix and flip loans. When you make a payment, it will only apply to the interest of the loan. For example, if you have an interest only loan, you will only be paying the interest for the previous month. Your payment does not apply to the loan amount itself. Many chose this option so that they have more cash flow going into the business and less going toward the principal. Remember, cash is king in real estate! 

DSCR and 30 year loans.

When you make your monthly payment, you will not only pay the interest for the previous month, but you will also pay a little towards the principal as well.  

We are here to help!

Here at The Cash Flow Company we want to make sure that you have everything you need to be successful. By further understanding the lending process, you will save both time and money!  It is important that you feel comfortable with this process so you can do more deals, and make more money! Contact us today to find more about How Interest Payments Work in Real Estate

Watch our most recent video to learn more about: How Interest Payments Work in Real Estate

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Interest-Only vs Amortization Loan: Calculating Mortgage Payment

In today’s market it is important to find a loan not only flexible, but one that also helps you to create cash flow. Today we are going to compare interest-only loan vs amortization loan by using an example. This will paint a picture of how these two types of loans differ. Which is best for you? Let’s dive in and see!

What is the biggest difference between interest-only and amortization?

Interest only loan products are loans where you are only paying on the interest that is owed on the loan. The principal on these types of loans never goes down unless you decide to put a  little money towards it. An amortized loan on the other hand requires you to pay not only the interest, but a little bit towards the principal as well. In this market, the rates are a little bit higher than they have been in years past. While an amortized loan typically has lower rates, it will also have the principal added to the monthly payment.

Example:

Loan amount: $200K

Rent: $1,700

DSCR ratio 1.1 

Loan Type Rate $200,000 x rate = annual interest Annual interest ÷ 12 = monthly payment Payment amount to mortgage company Taxes, Insurance, HOA, and Flood = $150.00

Creating Grand total for the month

Interest Only 8.25% $16,500 $1,375 $1,375 $1,525
Amortized 8% $16,000 $1,333 $1,333 Interest + principle = $1,468 $1,618

One more step. Adding the DSCR ratio.

What you will normally find is that the interest only rates in this market will be a little higher than the amortized loan rate. However, we still have one more step before we can determine if you can qualify for the DSCR loan on this property. We will need to multiply the grand total for the month by the DSCR ratio. This will help us to determine if the property will qualify for a DSCR loan based on the current rent amount of $1,700. Just as a reminder, the rents are based on what is happening in the market and the assessments done by an appraiser.

DSCR ratio 1.1 Grand total for the month  Grand total for the month x 1.1 = Difference after adding the  DSCR ratio compared to the $1,700 rent
Interest only  $1,525 $1,677.50 Will qualify for DSCR
Amortized  $1,618 $1,779.80 Will not qualify for DSCR

If you have any questions or want to run though the DSCR numbers, contact us today. We can help you compare a DSCR loan to an amortized loan. This will help you determine which is a better fit for your needs. 

Watch our most recent video to Discover Your Best Option: DSCR Loan – Interest Only vs Amortized.

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Discover Your Best Option: DSCR Loan – Interest Only vs Amortized

Today we are going to discuss DSCR interest only products and compare them to an amortized loan. Our goal is to not only look at the flexibility of an interest only loan, but to also demonstrate how it will help with cash flow. Which is best for you? Let’s start by comparing an interest only loan vs an amortized loan. 

What is interest only DSCR?

Interest only loan products are loans where you are only paying on the interest that is owed on the loan. However, principal on these types of loans never goes down unless you decide to put a  little money towards it. One thing to keep in mind with DSCR loans is that there are prepayment restrictions for the first 3 to 5 years. In most cases this means that you have a 20% cap during this prepay period. Paying a little extra doesn’t normally create an issue. It is just something that you need to keep in mind when working with an interest only loan.  

What is an amortized loan?

An amortized loan on the other hand requires you to pay not only the interest, but a little bit towards the principal as well. In this market, the rates are a little bit higher than they have been in years past. While an amortized loan typically has lower rates, it is important to keep in mind that the principal payment will be added to the monthly payment. In many cases the monthly payment for the amortized loan will end up being greater than the interest only loan. This difference can affect your ability to qualify for the loan because the property will not be a cash flowing investment. 

Example:

Loan amount: $200K

Rent: $1,700

DSCR ratio 1.1 

Loan Type Rate $200,000 x rate = annual interest Annual interest ÷ 12 = monthly payment Payment amount to mortgage company  Taxes, Insurance, HOA, and Flood = $150.00 

Creating Grand total for the month

Interest Only 8.25% $16,500 $1,375 $1,375 $1,525
Amortized 8% $16,000 $1,333 $1,333 Interest + principle = $1,468 $1,618

One more step. Adding the DSCR ratio.

What you will normally find is that the interest only rates in this market will be a little higher than the amortized loan rate. However, we still have one more step before we can determine if you can qualify for the DSCR loan on this property. We will need to multiply the grand total for the month by the DSCR ratio. This will help us to determine if the property will qualify for a DSCR loan based on the current rent amount of $1,700. Just as a reminder, the rents are based on what is happening in the market and the assessments done by an appraiser.

DSCR ratio 1.1 Grand total for the month  Grand total for the month x 1.1 = Difference after adding the  DSCR ratio compared to the $1,700 rent
Interest only  $1,525 $1,677.50 Will qualify for DSCR
Amortized  $1,618 $1,779.80 Will not qualify for DSCR

With DSCR loans you will have the flexibility of a 5, 7, or 10 year period. A DSCR interest only loan also provides an excellent opportunity for you to cash flow on the property. 

If you have any questions or want to run though the DSCR numbers, contact us today. We can help you compare a DSCR loan to an amortized loan. This will help you determine which is a better fit for your needs. 

Watch our most recent video to Discover Your Best Option: DSCR Loan – Interest Only vs Amortized.

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