Example: $100,000 mortgage at 6.0% w/ a ten year term amortized over 30 years.
• Payment: $600/month
In this case, in ten years the investor will have a remaining principal balance of around $85,000. The investor at this point must either pay the balance as a lump sum (which generally will require the investor to sell the property) or refinance the loan.
As with the interest only loan, this mortgage has the advantage of reducing the monthly payment on the mortgage, which improves the cashflow of the investment. The major risk is that investor must either be prepared to sell the property at the end of the term, or must refinance. Should the investor opt to refinance then he or she will incur the risk of higher interest rates, plus the expense of refinance.
The Author: Chris Smith is a real estate investor, founder of an online reference for investors and real estate professionals and has published articles in Corporate Finance Magazine, Euromoney, and the Business Journal Network. More about Chris Smith.
