Interest Only Loans and Mortgages

By Bruce Firestone | Uncategorized

Jun 27

Lots of real estate buyers ask for seller take back (STB) mortgages–sometimes in first place, more often in second.

So if you are having trouble making a deal/coming together on price or terms, sometimes you can bridge the gap between buyer and seller by arranging a STB.

Say, your buyer has been approved for an 80% LTV (loan to value) first mortgage, but only has enough saved up for a 10% down payment plus closing costs and any renovations s/he plans to do, then maybe the seller and buyer agree to a 10% seller-financed 2nd mortgage for two years.

(You should also know that professional investors like STBs for another reason–higher leverage (ie, higher loan to value ratios) can goose (increase) their IRRs, internal rates of return, under certain assumptions such as: a) the property cashflows, b) it appreciates in value, c) interest on debt is not exorbitant, d) amortization is occurring. So, within limits, more leverage and more properties early on when s/he is building up her/his real estate portfolio actually has the strange and pleasing effect of helping an investor pay off her/his mortgage debt faster later on…)

Buyers tend to like the idea of a long amortization period for their 1st mortgages and no amortization whatsoever (ie, interest-only) on their seconds. This is to keep their monthly payments low. It’s appealing, but it’s a mistake. Quick, how long does it take to pay off an interest-only mortgage/loan? Obviously, the answer is: FOREVER.

You’d be surprised at how quickly amortization can add up–it’s a kind of forced savings, and when it’s time to refinance, you may find that between some pay down of principal on your mortgages and increase in fair market value, you have enough room to pay off your second mortgage with a low cost first.

So I like to add amortization to pretty much any and all loans. Even if you are not paying off a lot of principal, it’s still better than none IMHO.

It’s also better for the seller–s/he is getting back some of their loan principal every month (or quarterly, semi-annually or annually depending on how frequent repayments are)…

I also like it when my clients get to the point where when they have a mature real estate portfolio (ie, it’s the size they want), they reset their amortization period to something much shorter–possibly 7 to 12 years so they get rid of their debt before they get too old and why they’re still earning income.

Lastly, as my clients age, they can add their children or grandchildren to the title of properties they own as joint tenants (as opposed to t-i-c, tenants in common). In this way, on their passing, they are automatically deleted from land titles and, basically, can bequeath their real estate investments to their heirs sans any probate taxes, delays, accounting or legal fees. It’s one of the few (legal) ways a person can cut out the IRS and, in Canada, CRA as well as greedy lawyers and accountants who, basically, feast on estates. 

@ profbruce @ quantum_entity

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About the Author

Bruce is an entrepreneur/real estate broker/developer/coach/urban guru/keynote speaker/Sens founder/novelist/columnist/peerless husband/dad.