Interest only loans are much the rave and a rapidly growing segment of mortgage industry. Introduced in the last few years they have grown in popularity. The intent of the loan was to provide flexibility for someone like a sales person who gets a big bonus at the end of the year that could plunk down a large principal payment with that bonus. Another application is for those with the discipline to make periodic principal payments.



During the years of rapid real estate appreciation, speculators sought these interest only loans because of the attractiveness of the payments. They were able to buy more than they could qualify for on a 30 year mortgage with the dreams of selling quickly for a profit. They maximized the purchase with minimum carrying costs.

Home buyers that purchased intending to live in the house used this loan program to buy a bigger house. When you couple the slowdown in appreciation in many residential markets with the non payment of principal, you have a prescription for danger.

Smart investors use the interest loan program to minimize their payments and keep their debt to income ratios low. They also are the ones that put back all the positive monthly cash flow into the property with principal payments equal to the cash flow. These investors are reaping the intended benefit of the interest only product.

The investors who pay additional principal payments are paying off the loan faster than with a conventional 30 year fixed mortgage where the principal repayment portion slowly grows and the interest is reduced even if the amount of the payment is constant. By paying down the principal on an interest only loan it results in a reduction in the interest payment amount due each month.

Imagine a payment getting smaller and smaller until it disappears. You end up with a decreasing payment due each month you pay the additional principal.

As investors ourselves, we only apply for interest only loan products, and we practice the principal pay down on all our interest only mortgaged properties. Say for example we have a $220 positive monthly cash flow. We add that amount to the interest payment due each month. If some month an unexpected repair is require, we just lower the $220 additional payment by the amount of the repair.

Our interest payment shrinks each month and so does our payment. Although the payoff is due in 30 years, we will have it paid off far in advance of the time period and remember, the tenant is paying for it all. When I know that it's the tenant's money paying off my mortgage I just love to write that mortgage payment.

So if you hold one of those great interest only mortgages congratulations, and remember to use that cash flow from the tenant to grow your wealth.