The mortgage product used to finance real estate investments has a large impact on the cash flow and profitability of the investment. This is a personal choice that depends on your goals for generating cash flow, your expectations of future interest rates, and your comfort level for debt. It is our belief that you should match your mortgage product to your goals for owning the property. For example, if you plan to own the property for 15 years you may want to lock in your rate for the long-term with a 30 year fixed rate loan. If you plan to own the home for 5 years a 5-year ARM would be a consideration because you can lock in for 5 years and get lower interest rate. Interest-only loans are popular with investors because they improve cash flow and offer more flexibility. After, all you can always pay down the principal of a loan, and cash in hand is more valuable than equity in a property.

Loan products change frequently and many new products are introduced each year. The most common loan products our investor use are:

5-Year (or 7 year) Adjustable Rate Mortgage – Interest Only
This loan offers a lower interest rate and locks the payment in for 5 (or 7) years. This loan adjusts after 5 (or 7) years according to the LIBOR index and is an interest only loan for the first 10 years. This loan helps generate better cash flow by keeping the payment low. It’s used for investors who expect to sell the property after 5 to 7 years, and who expect significant value appreciation. Value appreciation is critical to this loan product because none of the principal will be paid down.

30 Year Conventional
This is a traditional principal and interest loan. The payment is higher than the 5-year ARM because of the higher interest rate associated with this loan, and because a portion of the principal being paid down. This loan is most useful for a longer term investments to be help for 10 or more years, or in times where interest rates are expected to rise significantly.

30 Year Conventional – 10 Year Interest Only
This is an excellent combination of a traditional 30-Year fixed loan and an interest only loan. The rate is locked in you’re the 30 year life of the loan, but it is an interest only payment for the first 10 years. After 10 years the loan is amortized for the remaining 20 years with a portion of the payment going towards principal. This loan combines the cash flow generated from the 5-Year ARM loan, and the long-term rate protection from the 30 fixed loan.