Financing Strategies Evolve

The number of institutional financing options for investors has exploded in recent years. Lenders are offering a wider range of programs at a higher loan-to-value ratio (LTV) than ever before.
Programs with 100 percent financing and down-payment assistance have removed the cash barrier. Explore the options and determine how creative mortgage financing can meet your investment needs.

Flexibility

Flexible repayment terms make the "Option ARM" increasingly popular. The terms of this type of loan allow the borrower to choose from several payment options each month, including:

A payment based on a 30- or 15-year amortization schedule.
An interest-only payment.
A minimum payment of only part of the month's accrued interest; the remainder of the month's interest will be added to the loan balance.

The last option features a "negatively amortizing" loan on which the borrower will be paying compound interest.

Pros and cons

The lower payment choices offered by the Option ARM provide an affordable "tough-market" strategy to hold a property for appreciation while waiting for rents to catch up with values.
However, the appeal of lower payments must be balanced with the risk of holding a property on which the actual loan balance may be increasing. Additional considerations include LTVs of 80 percent or less, variable adjustable rates, and an inability to secure a second mortgage on your property.

Interest-only options

Interest-only loans provide a less risky method for keeping payments low while offering fixed rates and higher LTVs. For example, a $150,000 mortgage at 7 percent, amortized over 30 years, yields monthly principal and interest payments of $997.95.

The identical $150,000 mortgage, on a 7 percent interest-only loan, would yield a monthly interest payment of $875--a difference of more than $120 a month. These interest-only loans can make it possible to close a deal that otherwise would not have a positive cash flow.
Today there are more interest-only loan variations for investors than ever before.

Loans for rehabs

Rehab loans--combining the purchase and rehab costs--are becoming more available, too.
Similar to FHA's 203k loan, these loans involve less red tape and less stringent rehab requirements than government-backed programs. LTVs are generally available at 95 percent or more for owner-occupied purchases.

Down-payment help

The Nehemiah and the Neighborhood Gold programs use available home equity to help provide grants for down payments. However, these programs typically apply to first-time homebuyers and owner-occupants only.

PEI Lending Referral Services has recently developed an exclusive and innovative down-payment assistance program tailored to investors. (Go online at www.CarletonSheets.com).

With sufficient home equity, the down payment and the closing costs for investment-property purchases may be financed entirely.

Lines of credit

An ample line of credit allows for all-cash offers with a quick closing. This strategy can shave thousands off of the purchase price. And once the deal is closed, the bank secures the purchase amount with a first mortgage on the investment property.

A buy-and-hold investor uses a line of credit to acquire properties at a much reduced price, then he or she refinances to hold the properties as rentals.
A buy-and-resell investor uses a line of credit to acquire properties at a much reduced price, then resells at a higher price, reaping a nice profit in cash or notes.

Do the research

You should also spend time with a knowledgeable mortgage broker to discover the different options that will fuel your business and will help you to grow your real estate portfolio much more quickly--and more profitably!

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