Tag Archive for: interest only

How Interest Payments Work in Real Estate

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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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Facts About Real Estate Loans Every Investor Should Know

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Facts About Real Estate Loans Every Investor Should Know

Today we are going to discuss some facts about real estate loans and what every investor should know before diving in. Don’t run the risk of missing deals and missing transactions! There are a lot of moving parts that you need to take into consideration. This includes working with a mortgage broker and banker, as well as understanding what a loan is and what you owe. Here at The Cash Flow Company we like to go through the process to ensure that you have the leverage you need to be successful. Remember, leverage is king in real estate, you need money to make money! Where do you start? Let’s take a closer look.

Basics of a loan:

  • Loan Agreement

A loan agreement is simply someone borrowing money from another person and the agreement between them. Some examples are a promissory note and credit cards. To clarify, credit cards are an unsecured loan because there is no collateral. Unsecured loans are often available at higher rates than secured loans. Whether it is secured or unsecured, a loan agreement states how the money will be paid back, as well as the terms. 

  • Mortgage or Deed

People have either a mortgage or a deed, depending on the state. This secures the loan, by putting a lien on a property, and in turn gives the lender rights to the property. The documentation then goes on record with the county and shows that the property has a lien on it. To put it another way, the mortgage or deed provides the collateral for the loan.  

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.  

What to expect during closing. 

When you go to closing they will give you a settlement statement. It will list all of the charges that come with purchasing a property. The charges will include the real estate, title, lending, down payment, as well as any additional expenses. For example, on a $100K loan, you will need to bring $20K, plus any additional money that is needed to close the transaction. Don’t run the risk of being surprised at closing! Get the numbers upfront and make sure that you understand everything a few days beforehand.  Here at The Cash Flow Company our main goal is to make things as easy as possible by focusing on the human to human aspect. Is there a property that you are interested in and want to run the numbers? Contact us today to see if it is a good investment for you! 

What happens when the lien process is ending?

In looking at a fix and flip property, loans are typically a short term loan that is a 6 to 9 month term. A lien is placed on the property as collateral for the loan. Once the property is ready to sell, the investor will go to the title company for closing. The title company ensures that both parties get what they want and that all paperwork is complete. This third property reaches out to us as a lender and requests a payoff. After the lender is paid off, the title company will then make sure that the lien is released and ownership is transferred to the new buyer. 

What is a cross-lien?

A cross-lien is when you use a loan, but have to lien two properties because there is not enough equity in one property alone. Just to clarify, you can have a loan with two mortgages or two deeds attached to get enough collateral for the loan you need. The liens on both properties are released by the title company once the loan is paid in full.

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 Facts About Real Estate Loans Every Investor Should Know.

Watch our most recent video to learn more about: Facts About Real Estate Loans Every Investor Should Know

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Interest-Only vs Amortization Loan: Calculating Mortgage Payment

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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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Interest-Only Loan Part 1: Calculating the Interest-Only Payment

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Will an IO loan really save you money? Find out by calculating the interest-only payment.

There are two parts to an interest-only loan. Part one is just interest, and part two is the paydown, or amortization.

Typically, the interest-only period is 5 or 10 years where your only cost is interest. You aren’t required to pay down the principal at all during that time. So for, say, 10 years, you pay interest, but your loan amount stays the same.

Keep in mind, with an interest-only loan, you always have the option to pay down the principal. These loans typically don’t come with a prepayment fee.

Calculating Interest-Only Payment Example

Find the numbers relevant to your deals, and you can follow along by calculating the interest-only payment. You might need a loan for $500,000, or maybe just $100,000. For our example, we’ll use $300,000 as our loan amount.

The interest-only phase of interest-only DSCR loans uses one simple formula.

First, multiply the loan amount by the interest rate. This gives you the yearly interest. Divide that number by 12 (for the 12 months in a year) to get your monthly payment. The formula looks like this:

Loan Amount x Interest Rate = Yearly Interest

Yearly Interest ÷ 12 = Monthly Interest

We’ll use 8% as our example interest rate. So our equation would be:

$300,000 × .08 = $24,000

$24,000 ÷ 12 = $2,000

As long as you don’t pay down any principal during the interest-only period, your payments will be $2,000/month. This $2,000 goes directly to the bank. Your loan amount will remain $300,000, unless you choose to make an extra payment toward the principal.

Calculating the Interest-Only Payment While Paying Principal

Every time you opt into a principal payment during the interest-only period, your monthly payment changes.

For example, let’s say you pay down $20,000 from your loan, leaving the total loan amount as $280,000. You can re-use the previous formula with this new loan amount to get your new monthly payment:

$280,000 × .08 = $22,400

$22,400 ÷ 12 = $1,866

If you chose to pay down your principal by $20,000, your new monthly payment of interest would be $1,866.

How Annual Interest Works on Interest-Only Loans

Don’t let the idea of “annual” interest trip you up. For these interest-only DSCR loans, interest isn’t calculated once from January to December. Instead, the bank will do this formula each month for your loan using your current principal.

Remember that this interest is your monthly loan payment, but it is not your property’s total monthly expenses. If your loan is a DSCR, you also have to consider taxes, insurance, and HOA fees to know your actual monthly expenses.

Pros of Interest-Only Loans

There are two major advantages of interest-only loans:

  • Cash Flow – Interest-only loans lower your payments, which makes for less money out and more money in. With the interest-only period, you can do deals that would never work with a typical loan payment.
  • Flexible Refinance – You can refinance most interest-only loans at any time (dependent on the lender’s prepay policy). It can be a great strategy to use an interest-only loan for the next four or five years while rates are high. When rates come back down, you can refinance into another loan product that will build equity.

Read the full article here.

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How Interest-Only DSCR Loans Work

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Could interest-only DSCR loans be right for your properties now? Here’s how they work.

Hybrid products, like interest-only DSCR loans, weren’t as prominent three or four years ago.

But with current rates, interest-only is a strategy you need to look at in the real estate investing world.

Interest-only loans increase cash flow and leave you options for a future refinance.

Let’s look at how interest-only DSCR loans work, and what calculations you need to know.

Part One: Interest-Only

There are two parts to an interest-only loan. Part one is just interest, and part two is the paydown, or amortization.

We’ll go over the interest-only portion first.

Typically, your interest-only period is 5 or 10 years where your only cost is interest. You aren’t required to pay down the principal at all during that time. So for, say, 10 years, you pay interest, but your loan amount never goes down.

Keep in mind, with an interest-only loan, you always have the option to pay down the principal. These loans typically don’t come with a prepayment fee.

Interest-Only Example

Find the numbers relevant to your deals, and you can follow along with these calculations. You might need a loan for $500,000, or maybe just $100,000. For our example, we’ll use $300,000 as our loan amount.

The interest-only phase of interest-only DSCR loans uses one simple formula.

First, multiply the loan amount by the interest rate. This gives you the yearly interest. Divide that number by 12 (for the 12 months in a year) to get your monthly payment. The formula looks like this:

Loan Amount x Interest Rate = Yearly Interest

Yearly Interest ÷ 12 = Monthly Interest

We’ll use 8% as our example interest rate. So our equation would be:

$300,000 × .08 = $24,000

$24,000 ÷ 12 = $2,000

As long as you don’t pay down any principal during the interest-only period, your payments will be $2,000/month. This $2,000 goes directly to the bank. Your loan amount will remain $300,000, unless you choose to make an extra payment toward the principal.

Paying Principal

Every time you opt into a principal payment during the interest-only period, your monthly payment changes.

For example, let’s say you pay down $20,000 from your loan, leaving the total loan amount as $280,000. You can re-use the previous formula with this new loan amount to get your new monthly payment:

$280,000 × .08 = $22,400

$22,400 ÷ 12 = $1,866

If you chose to pay down your principal by $20,000, your new monthly payment of interest would be $1,866.

How Annual Interest Works on Interest-Only DSCR Loans

Don’t let the idea of “annual” interest trip you up. For these interest-only DSCR loans, interest isn’t calculated once from January to December. Instead, the bank will do this formula each month for your loan using your current principal.

Remember that this interest is your monthly loan payment, but it is not your property’s total monthly expenses. If your loan is a DSCR, you also have to consider taxes, insurance, and HOA fees to know your actual monthly expenses.

Pros of Interest-Only DSCR Loans

There are two major advantages of interest-only loans:

  • Cash Flow – Interest-only loans lower your payments, which makes for less money out and more money in. With the interest-only period, you can do deals that would never work with a typical loan payment.
  • Flexible Refinance – You can refinance most interest-only loans at any time (dependent on the lender’s prepay policy). It can be a great strategy to use an interest-only loan for the next four or five years while rates are high. When rates come back down, you can refinance into another loan product that will build equity.

Part Two: The Paydown

You never have to wait to get to the paydown in order to refinance your interest-only loan. Some investors refinance the same interest-only property over and over before ever getting to the paydown part.

The interest-only portion of an interest-only loan lasts for a set number of years. For example, let’s say ours lasts 10 years.

The paydown period is when the loan starts amortizing – the actual amount borrowed starts going down. However, you’ll still need to pay normal interest along with the principal payment.

With most lenders, you’ll get either a 30-year or 40-year loan. A 30-year interest-only loan would involve 10 years of just interest, plus 20 years of paydown. For a 40-year, you’d have 30 years’ worth of amortization payments.

A 30-year loan’s payments will be higher because you’re paying the same amount off in a shorter period of time.

Calculating a Paydown Payment Example

Let’s break down the difference between a 30-year and 40-year interest-only loan.

30-year loan = 10 years interest, then 20 years of amortization

40-year loan = 10 years interest, then 30 years amortization

You can use an amortization calculator tool to figure your monthly payments for the paydown period.

Let’s look at an example for a $300,000 interest-only loan. The paydown period payments would be:

30-year =  10 years of $2,000/month + 20 years of $2,509/month

40-year =  10 years of $2,000/month + 30 years of $2,201/month

Remember that you’re never locked into paying a full interest-only loan. An interest-only loan may be worth looking into for your property. Especially if you need a product with lower monthly payments while you wait out rising interest rates.

Help with Interest-Only DSCR Loans

Have questions about interest-only DSCR loans? Is there a deal you’d like us to take a look at?

We search hundreds of loans every month – now is a great time of variety in loan products. We’d love to help you find exactly what you need.

Email us at Info@TheCashFlowCompany.com.

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