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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! Cash Flow ARMs are a good choice when your house is seeing steady appreciation (5% or more) because this type of mortgage has the ability for negative amortization (the loan balance can actually increase over time). In this case, the rate of appreciation will simply out pace any increase in the loan balance. Cash Flow ARMs are good for houses that you are financing under 90% of the value or purchase price. In quickly appreciating housing markets you can get away with a higher amount but leaving a 10% equity cushion in the home is bare minimum. Why? Well, ff you get rid of the home via normal channels, your selling expenses could be anywhere from 9-15% of the sales price! No one enjoys the idea of having to come out of pocket to get rid of a house! You want to earn money! Real estate investors may get some of the largest benefits in using Smart Loans. When you buy a property that conforms to a few of the criteria mentioned earlier, using pay options will let you get 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. Increase Monthly Revenue – Cash flow is the main objective when dealing with rental property and cash flow ARMs are one of the best methods to increase it. Used correctly, cash flow ARMs can increase the revenue on you rental by over 100%! 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 unexpected repairs – In the same regard as the vacancy example, you will be better able to shrug off the effects of an unexpected repair because your cash flow has over doubled. 5. Give incentives to tenants for good behavior – You can be very creative here. Credit for paying before the first of the month (for example payment by the 25th). Discounts on longer term leases such as an 18-24 month lease, etc. The extra cash flow from using a pay option arm can stabilize you turn over and give you tools to help you with tenant retention, especially in competitive markets! 6. Use the house to get rid of personal debt – If your cash flow from getting a pay option ARM increases from $250 to $500 a month, you can use 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!
Article Source: http://www.phalenes.org/articles
About the Author: Fred Hopkins is an 8 year consumer loan industry vet and a real estate investor. He specializes in bad credit home loans and 95% and 100% investor loans. To sign up for his FREE Investor Financing Newsletter go to www.mountaintopmtg.net/investorloans. This article is available as a unique content article with free reprint rights.
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