7 Things To Consider When Financing Your Rental Property With Option ARMs

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!

Most people that get Cash Flow ARMs do it only to receive a lower payment on the home that they live in. They couldn’t afford it using any other kind of financing. They finance the house to the hilt and quickly they get upside down 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.

Smart Loans are good for houses that you are financing under 90% of the appraised value or purchase price. In quickly appreciating markets you can get away with a higher amount but leaving 10% equity in the property is bare minimum. Why? Well, ff you get rid of the property through traditional channels, your selling expenses could be anywhere from 9-15% of the sales price! No one likes the possibility of coming out of pocket to sell a house! You want to make money!

Real estate investors can find some of the biggest benefits in using pay option arms. When you take a property that fits some of the criteria mentioned previously, using pay options will afford you the following:

1. Payment Flexibility – Just as the name of the loan states, you have different payment options. One, you have a payment based on the beggining interest rate of the loan (which could be as low as 1% or less!). Two, you have the interest only payment. Three, there is the choice to pay based on a 30 year amortization term. Lastly, the fourth pay option is calculated on a 15 year term. The last 2 pay options allow you to pay down the loan 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 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 residents for good "deeds" – You can be very creative here. Credit for getting the lease payment to you before the beginning of the month (for instance, payment by the 25th). Reduce rent on longer term leases such as an 18-24 month lease, etc. The extra revenue from using a cash flow ARM can smooth out you turn over and give you ability to assist you with tenant retention, particularly in a renters market!

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.christiannotepad.com

About the Author: Fred Hopkins is an 8 year mortgage industry vet and a investment property owner. He specializes in online home loans and 95% and 100% investor loans. To sign up for his FREE Investor Financing Newsletter go to www.mountaintopmtg.net/investorloans.
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