Last Updated on May 7, 2022 by Eric Jeanette
Interest Only Investment Loans
Interest only investment loans are a great way to purchase or refinance an investment property while improving your monthly cash flow. They are available in short term adjustable rate or even a 30 year fixed option.
What is an interest only loan?
An interest only loan is one where you only pay the minimum required monthly interest amount for a specified period of time. Once that initial interest only period ends (typically 5-10 years), then loan will either convert to a fully amortized principal and interest payment or will have a balloon payment due.
How do Interest Only Investment Loans Work?
Interest only investment loans are available for two types of investment financing (Buy and hold or for fix and flips) and we will describe each below.
Buy and Hold
A buy and hold investment loan is one where you plan to hold onto the property for an extended period of time. In this scenario, you would be looking for the lowest interest rate possible to maximize your monthly cash flow. This version of the interest only investment loan typically will have higher closing costs and points.
The buy and hold interest only investment loan will likely have a pre-payment penalty of 3-5%. Therefore, it is important to know what your short and long term plans are for the property to reduce the chances of a penalty.
Fix and Flip
Fix and flip loans are short term loans that help investors to purchase a property, rehabilitate, and then sell for a profit. The interest rates are typically higher than a buy and hold investment loan. However, the fix and flip loan will not have a pre-payment penalty because the idea is not to hold onto the property for a long time.
The fix and flip loans also have the benefit of being an interest only investment loan. It is understood that paying a minimal amount of principal in just a few months is pointless when the money can be used to help with the rehab. Read [Fix and Flip Loans]
How to Qualify for an Interest Only Investment Loan
Qualifying for an interest only investment loan is fairly easy. Other than having a credit score of at least 650, you will not need to qualify using your tax returns or income documentation. In fact, a job is not needed for this type of mortgage program.
- Minimum credit score of 650
- 20% down payment
- Property is cash flow positive
- Property cannot be your primary residence
- No recent bankruptcies or foreclosures
The property cash flow or proposed ARV for a fix and flip is what lenders will focus on. The monthly principal, interest, taxes and insurance should be less than the proposed rent payment making the property cash flow positive.
If you would like to get pre-qualified for an investment loan, then complete this short loan scenario form.
Pros and Cons of an Interest Only Investment Loan
Although the interest only investment loan is a great program, one should be fully aware of the benefits and drawbacks for this type of loan.
- Improved monthly cash flow
- Easier to qualify for the mortgage
- Long interest only periods of up to 10 years available
- Rate adjustment to interest only is minimal
- Much higher payments after the interest only period is over
- No paying down of the original loan amount
- Slower to build equity
In the end, the interest only investment loan is a great choice if you are trying to improve your monthly cash flow.
Interest Only Payment Example
Below is an example of what the typical interest only payment would look like vs the fully amortized principal and interest payment. It also takes into account that often times the interest only mortgage rate is at least .25% higher
|Interest and Principal||Interest Only|
Do interest only investment loans have a prepayment penalty?
Interest only investment loans may have a pre-payment penalty if you are applying for the buy and hold version. The fix and flip interest only loans typically do not have a prepayment penalty.
Read more about Interest Only Loans
Investment Lenders – In this article, you can read more about how to qualify for an investment loan.