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Alternatives To High Risk Mortgage Refinancing |
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Submitted by Wilhelmina Mungera
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Most investors find themselves in a cash crunch at one time or another. Vacancies, renovations, changes in mortgage terms and interest rates, municipal fees and taxes, it can all add up.
This leaves investors scrambling to balance their portfolios. Most refinance with an eye on mortgage products with lower monthly payments. The current product of choice is the interest only mortgage.
This mortgage lets property owners pay the interest part of a loan monthly, while making capital payments at a later date.
However, other factors need to be taken into account, such as closing fees, financing rates, and interest rates. What may seem like a short term solution can turn into a long term nightmare.
If the interest only mortgage will be obtained for more than two years, the investor will pay twice the interest rate for two years, which can add hundreds of dollars to at the mortgage. This type of mortgage flipping also makes it difficult to estimate how quickly the mortgages will be paid off.
The cost of switching mortgages between interest only and fixed rate mortgages can be high. The interest only mortgage does not decrease in value. If the investor takes out a $200 000 mortgage and makes payments for 10 years, the investor still owes $200 000. This means that the early closing fees will be higher, as much as $8 000 to arrange the mortgage twice.
This means that the investor is paying a high price for the privilege of having lower monthly fees for a year or two.
One thing that causes investors concern is that the interest only mortgage forces the investor to lose their profits for a year, or more, until the mortgage is refinanced. This alone should make investors hesitate before signing an interest only mortgage agreement for their investment properties.
The secondary concern with the interest only mortgage is that it doesn’t free any equity from the home to create profits for the portfolio, when the property is sold. This makes it difficult to obtain future financing that is needed to continue buying new properties. It also makes it more difficult to sell quickly at a profit. Both of these are vital components of any successful property investment strategy.
There are alternatives. As heart-breaking as it may seem, selling a non-performing property will relieve the cash crunch, and protect future profits. Put some of the profit in a bank account where it can be used to leverage equity, preventing the investor from being forced to consider a dangerous mortgage product.
Another opportunity will be to arrange a rent-to-own option with one of your current renters, or to encourage renters to fill a few properties. The rent-to-own is a bonus for investors. The investor still profits, on an annual basis, even without flipping the property. If the renters leave, the property reverts to the investor’s ownership. The investor is not obligated to return any of the money to the renter – plus the investor still owns the property.
The average person moves once every five years. Combine this with the fact that renters who believe they are purchasing the home will take better care of the property, and the investor has created a win-win situation that increases their income stream while protecting their investments.
Smart investing requires more than understanding market trends. Sometimes an investor can avoid a disaster by taking a good look at alternatives to the traditional methods of investing, arranging financing, and flipping properties.
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