Using Interest-Only Loans to Finance Real Estate

There’s no magic trick to guarantee success in real estate, but one of the best tools for any Florida real estate investor is knowledge. Understanding all the resources available to you gives you a leg up when navigating the market.

Interest-only loans are an alternative to typical mortgages and other loans investors should consider. These types of loans provide more flexibility upfront while securing larger purchases otherwise unavailable to certain buyers. At Bryant Taylor Law, we know the advantages of these loans first-hand as we’ve helped draft them for clients and want to educate more real estate investors on how they work.

Interest-only payments

An interest-only loan sets terms for the borrower to pay only the interest of the loan over the initial term of the loan. During this period, the principal balance remains untouched as the borrower’s payments are directed exclusively to the interest. Generally, the interest-only payment period will be either five or ten years, with the principal payments being paid over the remaining term.

The payments during the interest portion of these loans are generally lower than they will be during the principal portion. This gives borrowers an opportunity to make financial headway over the first five-to-ten years of the loan and put themselves in a better position to afford the payments when they increase later on.

Higher interest rates

One of the only real drawbacks of these loans for borrowers is the interest will normally be higher. Lenders are taking on more risk, so the higher interest rates provide a level of protection on their commitment.

Essentially, the lender is counting on the value of the home growing over the course of the loan when principal payments become due. Short of this, the lender has to count on the borrower being capable of fulfilling their obligation once the payments go up.

Flexibility

These loans open up some doors that may have otherwise been closed. The lower early payments allow investors to compete with offers above their budget. The same can be said for real estate investors hoping to make multiple purchases at once as the loans can be applied to more than one property at a time.

This takes a real “bet on yourself” approach, as buyers will need to count on their ability to locate properties that will have added value over time along with betting on future earnings potential. This non-traditional approach to real estate financing adds potential to any portfolio.

When you have an attorney draft an interest-only loan can make your investment approach look more sophisticated and appeal to sellers and lenders alike. Our team at Bryant Taylor Law has experience writing the terms of these loans to help Florida real estate investors fulfill their goals in the market. If you think an interest-only loan could be a fit for your investments, contact our team today.

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