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.
Pay option arms are good for property that you are financing under 90% of the value. In fast appreciating markets you can get away with a higher amount but leaving 10% equity in the house is bare minimum. Why? Well, If you sell the house through traditional means, your selling cost could be anywhere from 9-15% of the sales price! No one likes the idea of having to come out of pocket to get rid of a house! You want to make 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. Payment Flexibility – Just like the name of the loan states, you have different payment options. One, you have the payment based on the start rate of the loan (which could be as low as 1%!). Two, you have the interest only payment. Three, there is an option to make a payment based on a 30 year term. Lastly, the fourth pay option is based on a 15 term. The last 2 pay options allow you to pay down on principle if you choose.
2. Maximize Cash Flow – Cash flow is the name of the game when dealing with buy and hold property and pay option ARMs are one of the best methods to increase it. Used correctly, cash flow ARMs can DOUBLE the income on your rental property!
3. Minimize affects of vacancy - Everyone who owns rental property has had vacancies. If you haven’t yet, just wait you will! One month vacancy, depending on the property, can just about destroy the profit for an entire year! Don’t believe me? Go ahead and add up the holding cost for carrying the mortgage, utilites, cleaning, and a little touch up paint and see what you get. If you had a way to reduce the largest expense, the mortgage, by a third, wouldn’t that soften the blow? Again pay option arms are the way to go!
4. No more worrying about surprise maintenance costs – In the same line as the vacancy example, you will be better able to minimize the effects of an surprise repair because your revenue 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!
