Getting an interest only mortgage for an investment property can help investors lower their monthly payments. However, it also comes with risks like balloon payments down the road. When used properly, interest only mortgages allow investors to free up cash flow for other investments. They work best for experienced real estate investors with a solid exit strategy. This article will explore the pros and cons of interest only mortgages for investment properties. We’ll cover topics like qualifying for the loans, tax implications, and managing the risks.
Interest only mortgages lower monthly payments
With an interest only mortgage, borrowers only pay the interest on the loan each month, not any principal. This results in a lower monthly payment compared to a traditional fully amortized mortgage. For investment property owners, lower payments each month mean higher cash flow that can be reinvested into other assets. However, the loan balance never goes down under an interest only mortgage. The investor needs to pay down the principal later with a balloon payment or refinance.
Investment property owners may qualify more easily
Lenders have tighter requirements for interest only mortgages compared to standard mortgages. Borrowers usually need excellent credit and a down payment of at least 20-25%. However, real estate investors often have an easier time meeting these standards than home buyers. They can use other investment properties to help qualify through factors like rental income. But programs and requirements can vary significantly between different lenders.
Interest payments may be tax deductible
With an investment property, the interest portion of the monthly mortgage payment is typically tax deductible. This can provide major savings and is one of the main appeals of interest only loans for real estate investing. However, investors need to be careful taking excessive deductions that could trigger an audit. It’s best to consult a tax professional to make sure interest deductions are handled properly.
The investor needs an exit strategy
The major risk of an interest only mortgage is the balloon payment at the end of the term. The investor needs to be able to refinance or pay off the loan balance completely when it comes due. This may require selling the property or paying far higher monthly payments after refinancing. Interest only loans work best for experienced investors who have a solid exit strategy already in place.
Interest only mortgages allow real estate investors to lower their monthly payments and maximize cash flow for other investments. But the loans come with risks like balloon payments. Investors need a clear exit strategy to manage these risks successfully.