Amortized vs. Interest Only Loans

Caeli Ridge recorded this episode on 8/15/2023

Amortized vs. Interest Only Loans

This week Caeli will be going into detail about Amortized (Close Ended) vs. Interest Only (Open Ended) Loans. She will highlight the differences and when you should be looking at either one as an option for your next loan transaction depending on your scenario.

Check out the video version on our YouTube page to see the Loan Amortization Schedule she is using and follow along. https://youtu.be/ezHbjDy5iDo

Q&A throughout the episode on these topics and more!

Check out the video with the screen share and the documentation in the Community.

You can join these live each week by following this link to join the call:
https://community.ridgelendinggroup.com/events/live-with-caeli-each-tuesday-beginning-at-430-pm-et/list

As always, give Ridge Lending Group a call if you have any questions at
855-747-4343 or email us at info@RidgeLendingGroup.com

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Karlie Libby: Hello! Welcome everyone to calling all real estate investors. This is a live event hosted by Caeli Ridge at Ridge, Lending Group.

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Karlie Libby: You can reach us at Info@RidgelendingGroup.com by email, or you can give us a call. That's 855, 74 Ridge, or 855- 747-4343.

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Karlie Libby: So we have switched to a new schedule of these live calls. So, instead of taking place every Tuesday. We're going to be taking place the first and the third Tuesdays of the month. And that's going to be at 1 30 pm. Pacific. Time, 4, 30 pm. Eastern time.

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Karlie Libby: But this month we do have a special episode for you guys, a bonus episode on August twenty-ninth.

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Karlie Libby: It's gonna be with a guest speaker. Her name is Tanisha Souza. She is with Tardis wealth strategies. So she's gonna be talking about. Her income, snowball. So this is

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Karlie Libby: something that she helped develop. It's it's showing you how real estate investors can buy rentals faster. By providing you with larger amounts of cash flow, and then our next following, that is, gonna be on September fifth

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Karlie Libby: that Tuesday, and we're gonna have another guest speaker. So back to back guest speakers. the one on the fifth. Her name is Kaaren Hall. So she's a self, directed Ira specialist. So she's gonna show you how to take self, directed Iras, and how to purchase real estate within that self directed asset class.

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Karlie Libby: So those are, really exciting looking forward to that. And for today's call for participation. Please just utilize the chat feature whenever you have a question, pop that in there. We also have it so that you can unmute yourself if Caeli does call out to you for any. You know additional information on those questions, but she will get to those as soon as she is able to alrighty

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CAELI RIDGE: handing it on over to you. Caeli. Thanks. Alright, thanks, Kay, bad. She's really coming into our own, isn't she? She's feeling good. Carly.

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CAELI RIDGE: Thank you, my dear. It's good to see everybody. Thank you for joining us. I have a quick, just a real quick, Doc Wex. I owe you a call. I see you're here. You are on my schedule today. I will reach out hopefully. We can connect if you're available. Thank you for your patience.

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CAELI RIDGE: alright. So today we're talking about amortization versus interest. Only I've got some visual aids. I'm gonna share with you guys in just a second. But before I get to that just a few housekeeping things for me that I wanted to ask you, Carly, if I don't know if you can do this on the fly. Get ready with a poll for us.

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CAELI RIDGE: Ii had a conversation earlier with a client today, and she had mentioned something about a master class for the All in one.

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CAELI RIDGE: You guys know that I'm such a huge fan of the All in one, for reasons that I've I've at nauseam shared with you. But II feel like because it's such a different

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CAELI RIDGE: concept for us here in this country, particularly that that people hear it, they still don't really, really grasp it. And for those of you that that continue to have questions or just don't get it

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CAELI RIDGE: once a month, maybe. Maybe the first Monday of the month. I don't know what we'd figure it out, but a master class where we really dig into conceptually and logistically all of the different variants. Nuance.

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CAELI RIDGE: interest rates, adjust or rate mortgage all of the different things that that make up this all in one for those of you that are interested in something like this. It would be the same. II come up with a syllabus syllabus, for example, it would be the same thing every month that I would put on this master class for people that would want to attend. So a yes or a no Carly, do you? Is that something you could do really quick? For those of you that are here today, anyone that's listening

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CAELI RIDGE: after the fact, if you guys just want to email info at Ridgeline group.com and say, Yes, masterclass on the all in one would be of use. Please let us know I'm I'm happy to do it. If there's a need for it. I just need to to know that you guys are are interested in that. So there's our poll. I think, you guys, I think everybody can see it if we wanna get some yeses or no. Is anyone that's interested in this

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CAELI RIDGE: free service of all in one. Okay, looks like it's a unanimous so far.

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CAELI RIDGE: Okay, so that's a yes, I'm just gonna say.

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CAELI RIDGE: let's yeah, let's give another second. 5, 4, 3. Okay. good. I think. Then maybe we'll we'll go ahead and do that for you guys. We'll put out those details as soon as we have them, and so just be on the lookout for that.

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CAELI RIDGE: And then also just heads up. This Friday, you're going to get our newsletter. We're talking about property management, and I thought that sometime in September.

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CAELI RIDGE: I would go into some of my own personal experiences about, you know property management, good, bad, and and in between for those of you, we'll go ahead and and promote it in advance. That wanna come with their own stories. Maybe we could share into a round table with like minded individuals like ourselves. And we can talk about some of the pitfalls. That we've we've had as property managers so I thought I would do that.

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CAELI RIDGE: Provide you guys with my own personal experiences over the years with property management.

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CAELI RIDGE: Some of it may be obvious and redundant, while other bits and pieces may be useful that you hadn't heard before. We'll see.

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CAELI RIDGE: Okay, so let's go and get into today's topic.

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CAELI RIDGE: amortization versus

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CAELI RIDGE: interest. Only. So I wanna start by saying guys that I have always been a pretty big fan

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CAELI RIDGE: of

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CAELI RIDGE: Hold on here a pretty big fan of an arm and an interest only product for a variety of reasons. I'll get into those in a moment.

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CAELI RIDGE: Let me get my stuff together here, cause I wanna share my screen.

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CAELI RIDGE: Okay, I'll get ready for that. Just just let's talk about the basics. Okay, amortization is actually a fairly simple simple way of understanding. It refers to the amount of principal and interest

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CAELI RIDGE: that's paid each month over the course of your loan term. Okay, near the beginning of the loan.

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CAELI RIDGE: The vast majority of that payment that you guys are making is for what

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CAELI RIDGE: interest right goes toward interest. So amortization is just a function of the split between interest and

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CAELI RIDGE: and principal.

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CAELI RIDGE: that your monthly payment is construct, comprised of over the term of your loan. 15 years, 7 years, 10 years, 30 years! Right? That's what amortization is. It's that interest rate term of the loan. And then the split between interest and principle that's paid every month, and it changes the first part of the the loan. Let's use our 30 year cause. That's really what we're probably gonna focus on

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CAELI RIDGE: the first part of the 30 year. Let's say the first 10 years.

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CAELI RIDGE: 98% of your payment is gonna be towards principal. Very little. Excuse me towards interest. Very little of that payment is gonna go towards principal in the first tenish years of that loan.

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CAELI RIDGE: That's amortization. Okay? Interest only is exactly what it sounds like, right? It's a loan where payments cover interest

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CAELI RIDGE: exclusively. There is no principle being repaid on that loan. The accrual is interest, only unlike amortized payments that pay both the principal and the interest interest only will not pay down that loan balance. Pretty simple, right guys. I mean nothing too crazy about that interest, only principal and interest anybody have any questions about this, the basic differences

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CAELI RIDGE: in interest only versus amortization.

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CAELI RIDGE: I'm gonna guess. No. So I'm just gonna move on. If you guys have your questions, put them in the chat, raise your hand, interrupt me if you need to, whatever it is

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CAELI RIDGE: so, going back to my statement a second ago, I've been a big fan largely in my career of arms, adjustable rate mortgages and interest. Only I'll I'll settle on the interest only part in a second. Let's talk about the adjustable rate mortgages, big fan of adjustable rate mortgages in

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CAELI RIDGE: an appropriate market. We are not in that market right now very, very important to preface by saying that we are still in what's called an inverted yield. You've probably heard me mention that term before an inverted yield means that interest rates for an adjustable rate. Mortgage actually price higher

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CAELI RIDGE: or not materially less or lower than a fixed rate mortgage that justify the the means.

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CAELI RIDGE: Let me say that another way.

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CAELI RIDGE: Since oh, 809, an interest rate. When I look at an interest rate between a 30 year fixed mortgage, all, all variables, all characteristics, are equal. 30 year fixed mortgage, and say a 5 year arm. In most cases, not all cases, but in most cases the adjustable rate mortgage is higher.

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CAELI RIDGE: Okay? Wh? Where's the incentive? Why would you ever lock in an interest rate on a 5 year arm. If that rate is higher than, say, the 30 year fix, you wouldn't. That's an inverted yield on occasion. We'll see adjustable rate mortgages price slightly better than a 30 year fix. Maybe it's an 8. Maybe it's a quarter depending on the loan size, though even then II just. I don't feel like it's justified. I usually wanna see at least a half

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CAELI RIDGE: and more often a point up to a point better or more on an adjustable rate mortgage to justify the means of going down that road and under normal market conditions

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CAELI RIDGE: all day long I'm gonna take take an adjustable why I like the adjustable because we know as investors that the shelf life

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CAELI RIDGE: let me back up and preface. There's exceptions to every rule. Okay, I'm talking generally. But the vast majority of us are not going to get a 30 year fixed mortgage, and then pay 360 payments to where we pay off that mortgage. It's highly unlikely. I mean, the percentages are fractions, especially for investors. So knowing that as investors, we're typically that shelf, life is gonna be around 5 years time

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CAELI RIDGE: to when we originate that mortgage to when we're selling it, maybe doing a 1031 exchange. Maybe we're doing a cash out refinance and harvesting, the equity of which is borrowed. Funds are non-taxable, right? Maybe we had a higher interest rate, and we want to reduce the interest rate. Maybe we had a balloon on the mortgage, and we need to refinance and get out of the balloon. Maybe we were in an adjustable, and we want to be on a fixed. All of those different reasons can be why?

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CAELI RIDGE: For that 5 year lifespan or life cycle is typical for investors. Okay. So if we know that if we know that that's gonna be the case and we're gonna be refinancing and under normal market conditions, an an adjust rate mortgage rate is gonna be.

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CAELI RIDGE: we expect significantly less

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CAELI RIDGE: a half a point to a point, or whatever it is, maybe in between.

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CAELI RIDGE: Why wouldn't you take that lower interest rate you would right? So normally, I am a big big fan of those adjustable mortgages right now. Not so much. I expect we'll see some improvement to that end where adjustables, arms would be more to our advantage or favor.

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CAELI RIDGE: Here's my! Here's my crystal ball

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CAELI RIDGE: the next year to couple of years. It's been a it's been a long time coming. I actually was of the opinion that we would have seen some improvement to arms. Well in advance before now. The pandemic didn't help for a variety of reasons, but even before then I expected that oh, 809, when we saw the housing and the lending implode on each other simultaneously for those of you that remember that that era

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CAELI RIDGE: I expected arms to to make a comeback before even before 2020, and it hasn't. So I was. I was mistaken about that. I get some things right. So II do expect that as rates start to come back down, as everybody is anticipating.

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CAELI RIDGE: That that arms may may play a bigger role in the coming months and years pay attention. You should be looking for that, or at least comparing it.

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CAELI RIDGE: You can decide that for whatever your reasons, that an arm isn't isn't a right fit for this property or for your circumstances, but at the very least you should be asking the question, and looking at the difference between the 2, and remembering that shelf life. Okay, looking back for those of you that have some history with mortgages, go back and look 3 years or 5 years or 10 years, and how often you, in your own circumstances, have kept a mortgage longer than

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CAELI RIDGE: XY or Z. Okay, those are going to be important details for you and making future decisions on what kind of loan product to to secure if it's to your advantage. Right? If you have that choice, and we're not on an inverted yield

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CAELI RIDGE: so big fan of the arm.

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CAELI RIDGE: an even bigger fan of an arm when appropriate and an interest only arm. And here's where we're gonna kind of get into my feelings about interest only versus principal and interest. I'm gonna share my screen now, and I have some notes here I took in advance

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CAELI RIDGE: so that I didn't have to try and strain my

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CAELI RIDGE: old eyes. I think I wanna be on this one.

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CAELI RIDGE: Okay, hold on gang.

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CAELI RIDGE: Okay, we're gonna make. This is just a standard loan amortization table. Okay, you can get these anywhere there, just go online, you can find. I like this one. It's just the one I've always used. Maybe that's why I like it.

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CAELI RIDGE: But these are very readily available anywhere. You look online, we will make this available Carly on the in the community, please, so that everybody can have access to it. These fields up here are the input fields for you, and then the data is over here.

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CAELI RIDGE: Alright. So I want to just kind of illustrate a few things. I've started at a loan amount of 350,000.

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CAELI RIDGE: Okay, an interest rate. I'm being very nice to our 30 year fixed principle and interest mortgage right now, at 7, it's actually higher than that.

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CAELI RIDGE: We've got 12 payments per year, and we're starting this mortgage in September. Okay? Right now.

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CAELI RIDGE: principal and interest payment is 2328 and 56 cents. We're not making any extra principal reduction payments. If we did do that.

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CAELI RIDGE: for example, maybe that's part of the scenario or or part of the the strategy for any particular property. I'd wanna talk you through that and and have some QA. About it. Normally, I'm not gonna stay on a closed ended 30 or fix mortgage. You should be making extra principal reduction payments. Because to get that capital back out is is not easy. It's not liquid, in fact, it's it's cumbersome, the qualifying the cost, etc.

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CAELI RIDGE: but if you did, you could mess around in here and see what were to happen

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CAELI RIDGE: with. How much interest is paid and the payoff time, etc. This might be a fun feature if, for example, somebody comes to me and says, Jaylee, II really only want a 15 year mortgage. I'm going to fiercely defend against that and say, no, you don't, because all that's gonna do ultimately is detract from or discourage optimal debt to income ratio, because that 15 year amortization is half. I'll just give you an example.

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CAELI RIDGE: Let's go. So let's say that the 15 year mortgage has a rate of 6 and a half. Okay.

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CAELI RIDGE: so watch what happens. I'm gonna draw your attention to this this schedule payment right here, this 2328. Watch what happens. So we go 6 and a half. I'm getting off topic here. But bear with me.

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CAELI RIDGE: and 15 years

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CAELI RIDGE: see what happened. The payments gone up by what? 700 bucks.

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CAELI RIDGE: So while maybe you can afford that, not a problem. What happens to your debt to income ratio?

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CAELI RIDGE: Because this is what's gonna report on your credit report? That's a $700 month higher payment

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CAELI RIDGE: between the 2

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CAELI RIDGE: that over time your debt to income ratio is going to suffer, when, if you really intent on not paying the extra interest. And and this payment is Ser. Is easy enough for you to afford. By all means do that, but do it this way.

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CAELI RIDGE: Watch.

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CAELI RIDGE: Let's see here, remember somebody. Remember this number for me

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CAELI RIDGE: 198, we'll call it A. Ho, almost 199,000 in total interest, using 6 and a half over 15 years. Okay, now, I'm gonna go back to 7

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CAELI RIDGE: over 30 years.

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CAELI RIDGE: Okay? So I understand the premise right? Nobody wants to pay

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CAELI RIDGE: twice as much interest. But what if we were to simply take our 30 year fixed?

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CAELI RIDGE: Okay? Comparing it to the 15 year and apply $700 a month with our regularly scheduled payment. That's roughly the same. Okay, watch what happens

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CAELI RIDGE: much, much closer.

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CAELI RIDGE: We're paying off in 193 months versus 180 months in this scenario, but what we've done. So we've we've manually manipulated the difference in in interest, accrual right cause. We're simply applying this every single month. I'm not saying that you should do this. I'm just illustrating a point.

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CAELI RIDGE: but we are not held to our feet are not held to the fire at that higher monthly payment, and our debt to income ratio will stay intact. So if anybody is is dead set on a shorter term amortization, I would tell them, take the 30 year. Let's figure out the payment difference and simply apply it every month with this payment. Right? You're in total control. And even in the months, let's say where maybe it went vacant for a month or 2. You're like, I said, your feet aren't held to the fire. The Dci would be optimized.

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CAELI RIDGE: Etc. Okay, I'll get off that bandwagon. Let's let's refocus. Now, chile. okay.

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CAELI RIDGE: So our 30 year fixed and comparing to our 15, I started our conversation by saying that the vast majority of your monthly payment, this guy right here in the first 10 ish years of this loan, is going to interest right? Well, I wanna go back to that 5 year, 60 month

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CAELI RIDGE: shelf life because we know that that's the approximate average that most investors keep their loans. Some would argue, or may have a comment on this call that say, well.

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CAELI RIDGE: the mortgages that they secured in (202) 020-2021, and in some cases 2022. Those interest rates are so low that they're never going to refinance those mortgages. I think that the percentage of people that that.

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CAELI RIDGE: Let's let's go back to just real time. The percentage of people, especially investors. We're talking about investors right now, under normal circumstances that start and stop with a 30 year fixed mortgage, where they've made 360 payments like later, and to pay off the loan is like, I said, a fraction of a percent. I think that because of the interest rates secured over the last couple of years, that fraction of a percent has gone up by maybe

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CAELI RIDGE: 4 or 5. It's still a very, very small percentage. And while I understand, people are are really hard

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CAELI RIDGE: wired to want to keep those those interest rates. Chances are that loan will be sold, or refinanced, or or paid off in some way or other, because you've sold it for a 1031 exchange, etc. It's highly unlikely that you will finish making

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CAELI RIDGE: 30 years worth of payments on that 4% or 3 and a half percent, or whatever it is. Okay.

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CAELI RIDGE: regardless getting us back on track again. Let's go down. So if you guys can see Carly, can you see this pretty well? Is it small? Do I need to try and make it bigger?

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Karlie Libby: It's a little bigger, maybe a little bigger. Okay, okay, let's see if I'm smarter than I look, hold on, you guys.

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CAELI RIDGE: Well.

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CAELI RIDGE: then, here.

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CAELI RIDGE: I don't think that's gonna do it. If anybody is an Excel wizard, and you want to tell me where I can go to make the fonts bigger. I know it's probably right in front. Here we go. Just kidding.

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CAELI RIDGE: Is that better?

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CAELI RIDGE: Yeah, that looks better. Okay? So left to right, we've got our first payment date. There's our balance. There's our payment right? You can see how much is going to principal interest. Yada. Yada, Yada, okay, I want to take us down. Don't look at the Excel numbers. I'd look at the inside the the worksheet.

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CAELI RIDGE: so let's go to 60 months.

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CAELI RIDGE: Okay, right here. This is the guy that I wanna focus on. This has been 5 years. You've had this mortgage.

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CAELI RIDGE: And this is the starting, the beginning balance at the fifth year, 60 months. The ending balance is 3, 29, 4, 60. That is the ending balance. After 5 years of making mortgage payments. The difference between this and our starting 350,000 is 20,005 40.

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CAELI RIDGE: Okay, so we're 5 years. You paid down $20,000, 540.

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CAELI RIDGE: Now consider this. Let's take 7%

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CAELI RIDGE: interest only on $350,000. Your your interest only payment would be. These are my notes that I wrote down interest. Only payment is $2,041 and 67 cents.

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CAELI RIDGE: I take that minus 2328, right? Principal and interest. And that is a monthly difference of about $287 a month. Okay, now, what I want you to do is, imagine taking that amount 200 $9,287 a month. Payment difference

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CAELI RIDGE: times 60 months is what 17, 2, 1, 3,

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CAELI RIDGE: okay, 17,203 that you have been able to retain in cash flow, that you've set aside

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CAELI RIDGE: versus the 20,000

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CAELI RIDGE: that we've paid down the mortgage balance over that 5 year period of time. The difference between those 2 numbers is roughly 3,300 bucks.

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CAELI RIDGE: Okay, so $3,300 is the difference in the principal reduction. and the interest-only payment that you have retained in cash flow every month over 5 years.

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CAELI RIDGE: My next comment will be. What if you wanted to get access to that money?

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CAELI RIDGE: What if in 5 years time it's appreciated whatever? Okay. But you wanna you wanna recapture some of that, that equity that you've built in this property. What's it gonna cost you to do that? Is it going to be more than $3,000?

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CAELI RIDGE: Hell. Yes, it is. Of course it is so just by itself. There's your difference. I would also argue that when you're looking at your schedule, E.

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CAELI RIDGE: Your

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CAELI RIDGE: your interest, deduction that you can claim will be higher by X amount than if it were just the principal interest, or that then it would be the principal and interest that you were paying the interest deduction is gonna be less by about that much.

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CAELI RIDGE: So that would be a secondary piece. Does everybody see where I'm going with this, and why I'm even talking about it. Does anybody have any thoughts or questions?

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CAELI RIDGE: Carly, anything that we want to get into. We had a question earlier. Tonya asked. Does when you were talking about making those extra optional payments? Does it help accelerate your equity?

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CAELI RIDGE: Sure.

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CAELI RIDGE: But it's it's trapped equity.

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CAELI RIDGE: Right? So yes, certainly. You're going to be paying lesson interest if you if you accelerate. That's true, but less than interest over the 30 years, because remember that first 5, especially 5, and even into 10,

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CAELI RIDGE: the amount of principal that's being paid is a very, very small percentage of the overall payment. And again, just to reiterate it's locked up equity. You can't. It's not like it's liquid. You can't get at it at a whim, or if you need it, you have to do what a full cash out refinance

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CAELI RIDGE: right? Or

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CAELI RIDGE: if if it's available, some kind of a heloc on an investment property, and, secondly, in position. Those are not going to be easy to come by right now, for sure. Will that open up in the future?

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CAELI RIDGE: I hope so. II would love the I mean. That would be the best of all worlds. Right? Everybody gets to keep their low interest rate on their first mortgage

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CAELI RIDGE: right? If they're gonna keep this property, they don't have plans to sell it or do a 1031 exchange. And that argument about how how low the rates were, and what they got, and they that they don't want to get rid of it

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CAELI RIDGE: if we can find Helocs in. Secondly, in position. That's fantastic.

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CAELI RIDGE: as far as I know, and and somebody feel free to to disagree or give us some some intel. Those are not available. Second, lean investment property. He locks currently are not available. We have he loans. You guys know, that Ridge has closed ended. He loans. That's not liquid. Those are going to be 1213% mortgages that are a 30 year, just like your first mortgage. 30 year amortized, closed, ended

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Karlie Libby: anyway.

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Karlie Libby: But it was considered a business loc, but it was secured by a property so cool. If you want to share with whom it won't hurt to check you guys.

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CAELI RIDGE: if you can find a heloc

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CAELI RIDGE: on investment properties.

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CAELI RIDGE: a. Investigate it, go and and grab it. Go, go! Get one. I would advocate for the All-in-one anybody that wants to know why. Just ask me, and I'll I'll explain. But I think it's superior in most ways, and then oftentimes, even up against a 3% interest rate. Believe it or not.

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CAELI RIDGE: It's a velocity of of money and and banking. We can talk about that another time. I don't want to get on my all in one soap box.

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CAELI RIDGE: So okay, let's kind of bring this back around interest only

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CAELI RIDGE: amortized when it's viable. I am always going to go for the interest only for the reasons that I've described here. Are there exceptions to the rule? Of course there will be

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CAELI RIDGE: so make sure that it fits with with the project and the strategy and and right all of those things, but more often than not for investment purposes. I love the interest only right you get to keep your cash, keep your cash flow. It's not tied up over here. You're not risking or really losing anything. In fact, I think that you're on the the upside to do an interest only. And remember, I haven't even gotten into appreciation of rents.

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CAELI RIDGE: Right? That's that's not even included here. This number won't change, no matter how much extra you throw at it. That's still gonna stay static and consistent.

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CAELI RIDGE: If you're appreciating your rents every year, which I believe you should be at a very modest, 2 or 3%, very, very modest. Then

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CAELI RIDGE: the conversation and the numbers that I just kind of spit out at you will even work further to your advantage.

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CAELI RIDGE: Thoughts, questions, gang anything about this or otherwise. I'm running out of content here. I think I went over. Unless you guys want me to go back through the numbers that I just I know I went over it kind of quick. If anybody wants me to just reiterate.

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Karlie Libby: yeah, we do have a question. From Chris. I think he was maybe talking about the difference in the all in one. Let me know if that's not right, Chris. But, he asked, is there a difference in qualifying, or does it come down to Dti and or the property performance.

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Chris Barrett: Currently, is there a difference of qualifying for interest only versus a conventional

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Chris Barrett: and kind of so what do you look at to qualify for interest only? Or does it come down to the same metrics where you know Dti or property performance?

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Chris Barrett: You know, debt coverage. How does that kind of work out, cause I'm

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Chris Barrett: again, mind blown I made the discovery that for our personal houses the interest rates don't matter at all for us. We never live anywhere long enough for the interest may rate to matter. So I had been putting down 20 on the first several properties we own, and then we kept moving within like 4 years.

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Chris Barrett: And I'm like, why am I doing this? It doesn't really matter what the interest rate is. It's never gonna amount to anything big, you know any big difference. And so this is really blowing my mind because you're absolutely right

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Chris Barrett: on the dollar amount you'll save, you know. Are, are, you know, spend less, basically over 5 years plus the tax implications

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Chris Barrett: which would be for me huge cause. I'm

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Chris Barrett: part of the overtaxed kind of, you know upper kind of upper upper edge of the middle class, not like upper class, but like I pay a huge amount of my income in taxes as an employee

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Chris Barrett: and so like, that's gonna make that'll make up the $3,000, probably easily for me.

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Chris Barrett: And so like, really, this is really really interesting to me, because I never had done the math.

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CAELI RIDGE: The qualifications will be both

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CAELI RIDGE: or or either so let's break that down. So when we're talking about interest only. And and remember, you guys, this is under normal normal market circumstances, interest only and and arms right now are not really going to be to our our advantage more often than not the straight 30 year, fixed principle and interest is going to offer the best path forward. Okay, I hope that changes real soon.

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CAELI RIDGE: But under normal circumstances, whether it's going to be debt service, coverage, ratio, where all we care about is the properties income divided by the payment

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CAELI RIDGE: or debt to income ratio, your income divided by your monthly liabilities on your credit report. It's gonna be a factor of either you can choose from either of those things, and depending on what your qualifications are. The interest rates gonna vary a little bit right, a debt service interest only versus a full income. Dti loan interest. Only this guy over here the full Dti debt to income is gonna have a lower

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CAELI RIDGE: interest rate than a debt service interest only will. So it'll be subjective, Chris, to to you know which classification you fit in at that point in time.

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Chris Barrett: Thank you for the question. Yeah.

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Karlie Libby: alright. We've got another one here from James. He asked. If you can compare the interest only loan versus a 10 year fix arm loan.

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CAELI RIDGE: Oh, sorry I was doing months. Forgive me.

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CAELI RIDGE: Okay, let's check it out. So what James is asking is. And and I I'm it's been a while since I've done this math. So let's compare.

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CAELI RIDGE: Let me go back. So let me, let's start over again. Okay, so here's our our 30 year fix. No, no, he wants interest. Only I'm sorry. Sorry guys. So a 10 year loan. Let's say that the interest rate on a 10 year fixed

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CAELI RIDGE: this is amortized over a hundred 20 months. Hey! Look at that sucker!

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CAELI RIDGE: $4,000 at 7. Let's say that

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CAELI RIDGE: 6.2 5 II in fairness I should know the spread here. I don't, so I'm guessing I use 6 and a half as a lower rate from a a 30 to a 15, and I'm using 6 and a quarter from a 15 to a 10. I'd probably need to go and and double check all of this. But let's just take it for what we've got here. So

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CAELI RIDGE: hold on, let me get our interest only payment

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CAELI RIDGE: times 6.2 5. I'm assuming, by the way, that the interest. Only rate is the same as the fixed rate. That's another

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CAELI RIDGE: variable that I don't. I did not quantify, so the interest only let me make sure I did that right, James. Hold on 3, 50

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CAELI RIDGE: times 6.2 5, divided by 12. And then. just because I'm gonna say it, I know that I hope it doesn't sound stupid to anybody, because you probably right. This is

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CAELI RIDGE: the math. To figure interest only is ridiculously easy, just for those that may not know. Take the loan amount times the interest rate percent signed divide by 12. Okay, you're gonna be within a few bucks. It's as easy as that. Okay, just in case

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CAELI RIDGE: interest, only at 356.2 5 is going to be $1,822 versus this guy. And then we're gonna come down here and look at that math again.

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CAELI RIDGE: So minus so 1822, 92, I'm just gonna call it 1823, minus

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CAELI RIDGE: thirty-nine-thirty. Okay.

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CAELI RIDGE: so 2107

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CAELI RIDGE: is the difference between an interest only and a 10 year. Everybody following me. If you're not somebody, raise your hand, and I'll I'll slow down.

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CAELI RIDGE: Okay, 2107 times 60 months

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CAELI RIDGE: is a hundred 26, 4, 25.

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CAELI RIDGE: So that's the cash flow. That's what you're keeping. If you were to take the interest only in in your Kitty 126,425, let's see how this math plays out at the 60 months. So we started at 3 50,

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CAELI RIDGE: and if at halfway through

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CAELI RIDGE: 87, this is how much interest you've paid.

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CAELI RIDGE: and this is what you've you've you're ending balance 102. So let's let's do the math.

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CAELI RIDGE: Hold on, guys. I can't do mental math. So 60 months is 202, we'll just call it 202, even

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CAELI RIDGE: 1 48. And what did I say? That difference was, I'm sorry. Gang. Give me a minute. 3, 50,

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CAELI RIDGE: 21, 7.

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CAELI RIDGE: So 1, 26.

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CAELI RIDGE: So it's a little bit better on the 10 year, James, I would, I would grant you. Of course, I mean, that was what I expected. So what you're leaving in 126 is what you're you're keeping in cash in cash flow. Okay, versus 148 is what you've paid down on the the 3 50 starting balance

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CAELI RIDGE: minus.

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CAELI RIDGE: So it's a 21,000 difference there between the 2, but do the same the same calculation.

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CAELI RIDGE: and the other thing too, because these are much bigger numbers that we need to account for. Let me let me, let me take this sequentially. So the cash flow immediate cash flow.

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CAELI RIDGE: Okay, versus what you're tying up. It's 21,000 and a little bit of change difference to get out that $21,000, that difference between what you've paid down

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CAELI RIDGE: on the mortgage and the interest only that you've been able to hold on to over that 5 year period of time. What is the refinance going to cost you?

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CAELI RIDGE: Okay? 10 grand. So you're still 10,000 ahead on the 10 year option on the the amortized tenure fixed

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CAELI RIDGE: the interest you gotta. And that's that's a variable we can't really solve for mathematically right here. But you also have that incentive. But let's say that it it gives you

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CAELI RIDGE: half that back, maybe more, depending on on what your brackets are, etc. So now we've got 5,000 left.

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CAELI RIDGE: and the final piece here, I would say, is that that 126,000 over that period of time? Let's just take it. In 2 and a half years

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CAELI RIDGE: I would have taken that cash and redeployed it for another investment, and whatever return that I'd be getting on that, and I think probably far exceeds

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CAELI RIDGE: the value of that that tenure against the interest only.

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CAELI RIDGE: So let me say that another way. So if in 5 years time. The interest only is going to keep 126,000 in my pocket. Let's take it at one and a half, or excuse me 2 and a half years half the time.

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CAELI RIDGE: so I've got $63,000

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CAELI RIDGE: that I have that I would have then deployed. I would have stockpiled and deployed for a down payment on another investment, perhaps, and the return of that, and the interest credit for that, and the appreciation for that, and the rent increase appreciation for that. Right? II think you guys know where. See where I'm going with that?

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CAELI RIDGE: James, how did I do? Did I answer your question. Is that what you wanted to see?

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Karlie Libby: Hmm!

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CAELI RIDGE: They can unmute themselves right, Carly.

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Karlie Libby: Yes, I can

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CAELI RIDGE: feel free, James. If if not, you can put it in the chat, if that's easier, sir.

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CAELI RIDGE: I still like the interest only

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CAELI RIDGE: for those reasons. Now that might not fit into your scenario. Your circumstances might might have more hair on it. There might be more

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CAELI RIDGE: details that that you know

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CAELI RIDGE: make the amortized mortgage more to your advantage.

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CAELI RIDGE: and that's fine.

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CAELI RIDGE: What else gang?

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Chris Barrett: I'm gonna pop in with another question. Or what's the term? Typically on interest only is, is it typically over 30 years, or cause. I know I'm familiar with bridge loans, obviously that are interest only that are like a year term. But on a you know, kind of on this type of

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Chris Barrett: loan product you're, I think you're talking more about it being spread across a 30 year term.

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Chris Barrett: Is that fair? Yeah, it'll be yeah. So usually.

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CAELI RIDGE: you're gonna be, you're gonna be able to choose like a 5 year interest only with a 25 year repayment or or becomes principal and interest, and it can adjust. After that I think the the one that I like the best is a 30 year, 10 year interest only 30 year term, with a 10 year interest only after that 10 year interest, only period of time. If you just

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CAELI RIDGE: kept the the mortgage, it's going to take that interest rate. and it's going to calculate a payment and amortized payment over the remaining 240 months or 20 years. Yeah, that's I think that's the one that that if if I if I got to choose, that's the one I would choose

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Chris Barrett: that's really interesting. I didn't even know that that was a thing. So

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CAELI RIDGE: yeah. Well, it's it's been a while right. They haven't really been a prolific part of of. you know. Mortgage-related finance, especially for residential real estate investors

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CAELI RIDGE: soon let's hope it's back soon. What else? Anybody else, Carly? Anybody got anything

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Karlie Libby: no questions in the chat but pop those in there, if you have them, or you can unmute yourself if you wanna say it out loud and ask Chili

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CAELI RIDGE: anybody.

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CAELI RIDGE: Okay? Well, if if I'll give you a couple more seconds to think of it. If you wanna throw something at me just to recap Friday, will, you guys will see our our newsletter come through

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CAELI RIDGE: property management. I'm going to be sharing sometime in September my own personal experiences with property management and some of the the do's and don'ts that that have befallen me some wins and losses and property management.

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Jason Jones: Hmm! There was another thing. I was just gonna tell you and and and that's it that's gone. I don't remember. That's okay.

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Jason Jones: on the what? On the on the what? 21.

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Jason Jones: Thank you. Got your rent increases appreciation. The property, so so forth. So, yeah, but I'm like everybody else. This is pretty cool stuff. So thank you.

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CAELI RIDGE: Double. J, thank you. Did everybody get what he just said, does that make sense? Does that resonate with everybody what he just? He did the math, and gave us what the return on that would be? And it it it more than exceeded the benefit of

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CAELI RIDGE: the locked in equity that you would be building on a 10 year

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CAELI RIDGE: amortized mortgage. So for my money, I'm always gonna go interest only when it makes sense. Now let me take this. So II didn't talk about this yet. And I there was something else. I just can tell you guys, and I just forgot it again. And if I remember, I'm gonna write it down. So don't forget

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CAELI RIDGE: Let's let's talk about

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CAELI RIDGE: once. So if we have this interest only

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CAELI RIDGE: actually do, I want to do it that way.

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CAELI RIDGE: Well, I'll even come back to that. I know what I was going to say before this is going to be made available. If you guys want this amortization table, it's the one that I like feel free to take it down just as a reminder. This will be on on the community if you need it or want it.

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CAELI RIDGE: My recall, I think it's early on set menopause. Tmi, but I'd I don't know. This is for the ladies, anybody else that that has any tricks about it. I am all for sharing

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CAELI RIDGE: my recall. The last couple of months has been horrific, and it's making me crazy. Sorry, Dudes II just I had I had to share, because you're probably noticing that that I will have something, and I'll be talking about it. And then it's just gone again.

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CAELI RIDGE: I'm not completely incapacitated, just only only partially. I'm told that the it will. It will run its course, and I'll be back to New soon. What was it?

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Karlie Libby: Well, if you if you do want to join the community and you're not a part of it already. You can always check it out on our website. Just so you guys know. So if you want to see that there the loan amortization schedule or it's available on the reminder emails that we send out up at the top left hand corner. There's a hyperlink that you can join the community. So whatever's easiest for you. But yes, please join us there.

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Karlie Libby: and that way you can play around with this and then we do have a couple of more questions. Let's see?

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Karlie Libby: We have one here from Tanya. She asked. If you could explain arm adjustment caps?

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CAELI RIDGE: Every adjustable rate mortgage will have certain rate caps associated, and they they change, depending on the product. But a rate cap is the maximum that the interest rate can adjust to in any period of time, and the numbers that Tanya gave us were what I wrote it down. 2, 1, 5. Okay, there's 3 numbers a 2, a one and a 5.

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CAELI RIDGE: The first number means that at the the anniversary of the locked in rate period, let's use a 5 year. Okay, a 5 year arm. That means that the interest rate that you secured on day. One will be the same for 60 months or 5 years. The 2 and the 2 1 5 that Tonya gave us is the first rate adjustment. So in month 61, potentially, the rate can adjust up to a maximum of 2%

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CAELI RIDGE: from where you started. Let's say that you started at 5.

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CAELI RIDGE: Okay, so the very first rate adjustment cannot exceed 2 over 5. So 7 would be the maximum

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CAELI RIDGE: that the interest rate could just adjust in that first adjustment. Now, the piece that you would need to understand, too, is that how often, after the first, the the fixed rate portion, can the rate adjust. Generally, it's going to be once a year. Sometimes it can be twice a year every 6 months. Okay? And we're gonna say, for our example that the rate can only adjust once a year.

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CAELI RIDGE: So the first rate adjustment in that want that one time per year the rate will not be able to exceed 7%, which is 2% over our starting at 5. If that's where we started. Okay, that's the first number 2, 1, 5.

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CAELI RIDGE: The second one means that each subsequent rate adjustment, the rate cannot exceed one in that

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CAELI RIDGE: one year period of time. So in the next month, month, 73, right? So 60 months full year later.

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CAELI RIDGE: Sorry. Then, I do. The yeah. 70 yeah. Month, 73. We're gonna be in the sixth year.

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CAELI RIDGE: That means that the interest rate. Let's say that we jumped all the way to 7.

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CAELI RIDGE: So the next rate adjustment in each subsequent one. After that the rate cannot increase more than one. So let's say, it goes to the full in in month, in year 6.

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CAELI RIDGE: Or actually, it's gonna be your 7 sorry guys. It will be up to a maximum of 8.

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CAELI RIDGE: Okay, if it if it adjusted the full. This is the caps maximum it can adjust in each subsequent adjustment. And then the last number 5, 2, 1, 5 is the life cap.

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CAELI RIDGE: So that means that if we started at 5 plus 5, 10% is the maximum that interest rate could ever ever adjust. So, depending on how it goes after that first 5 years.

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CAELI RIDGE: Let me see if I can do the math really quick. The first year it adjusted the full 2 cap. So we're at 7 the second year, is it? Adjusted the full one. We're at 8, the next 1 9, and then the next one. It did it again. 10. You're at your cap there it would never. And I think that's here. If I counted it right, that's going to be your 8 or 9,

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CAELI RIDGE: you could never exceed that amount for 30 years, because any adjustable, at least in the terms that we're talking about. Let's keep using my 5 year example. This is a 30 year mortgage. Okay, with a 5 year rate

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CAELI RIDGE: cap. And in our example. I'm we're talking about principal and interest right now. Not interest, only don't confuse those. So what that means is is that if you wanted to keep that 5 year arm for 30 years, which I think we've already identified. That it's highly unlikely. But if you wanted to.

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CAELI RIDGE: you could just continue to let the rate adjust. If you know what your life cap is, it's never gonna be over 10. And sometimes, if you kind of are, if you're cognizant, or you're paying attention to where the market is, where it was, where we think it's gonna go. There may be some incentive just to let the thing adjust

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CAELI RIDGE: versus going out and and getting

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CAELI RIDGE: a different interest rate or refinancing into a different interest rate, just because you think that the adjustable is gonna start changing, it may be to your advantage. In fact, after 809

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CAELI RIDGE: people that had adjustable rate mortgages at that point, a lot of them

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CAELI RIDGE: started. Let's say they had a 6% interest rate. And for years after that they were paying interest at like 4%, because those indexes the part of an adjustable rate mortgage, which I don't think I mentioned so real real quickly. You've got a margin in an index, the margin in an adjustable rate, mortgage is fixed for 30 years. If you keep this loan it will never, ever change. It's fixed.

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CAELI RIDGE: The index, whichever there's lots of indices, whichever index you're using is the one that can move up and down, depending on the caps and the term of the the loan, etcetera.

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CAELI RIDGE: So both of those 2 things added together as your fully indexed rate. And that's what the payment is going to be based off of.

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CAELI RIDGE: Okay. So if you know that your index was X when you started

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CAELI RIDGE: this loan. Okay? And you know what your rate caps are. Once the let's 5 year right? You've got your 5 year arm. Once that period of time has passed, elapsed.

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CAELI RIDGE: and you check, and the index is lower now

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CAELI RIDGE: than it was when you got it before. Why would you refinance, let it adjust, it can adjust down. So we just talked about the rate caps and the the maximums. There's also going to be a floor which is often well, that's the reverse to this, the lowest amount of interest that you'll ever pay.

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CAELI RIDGE: and it's often

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CAELI RIDGE: not always, but often the same as at least the margin. So if your margin was 5, your floor rate is probably 5, too, because what happened at the O. 809 crash is, we saw negative interest rates. I don't know if any of you remember that

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CAELI RIDGE: so negative interest rates reducing from the initial margin that they had people. The banks were losing money hand over fist, and that that actually added to some of of the collapse.

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CAELI RIDGE: So as a result of it, we have floor rates so that you can't. That can't happen anymore. During repayment. Excellent question. I hope that made sense. I know that was kind of a lot kind of technical stuff. But good question.

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Karlie Libby: We have 2 more here. One from James. When would it make sense to use an interest only loan

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CAELI RIDGE: I like to see an interest only loan saving at least a hundred bucks a month. I you gotta do the math, and it's it's largely going to be dependent on the loan size

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CAELI RIDGE: and you gotta figure out what is what is the plan or trajectory of the property. Do you know that you're gonna keep it at least 7 years? Do you have some some plans for it for for trusts or or

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CAELI RIDGE: legacy? There's there's too many variables to try and guess on that. But I would like to see the interest only be at least at least

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CAELI RIDGE: saving $100 a month, but you still have to do that math, and this should help you. Just kind of do it for you. All you have to do is, find that 5 year mark, or wherever you think. Maybe it's a 3 year mark, right? Wherever you know that that you're probably gonna be looking to refinance pull equity out. That also depends on what the appreciation play of the the property you're getting into might be. But just do the math find the month in which you think it's realistic to to sell or refinance, etc. Look at the ending balance.

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CAELI RIDGE: and then you you know what the difference between your interest only and your

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CAELI RIDGE: principal and interest is, and then you can do that math for yourself.

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Karlie Libby: Perfect. Alright so we have one more here. But just before that, just wanna let you know, chile, you're not the only one about the recall. It looks like Chris Barrett says his wife also says that, too, and Tonya totally understand. So

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Karlie Libby: but well, I will go with Michael here. So? He asked, looking for some clarification. It looks like.

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Karlie Libby: So the 10 year interest only mortgage recasts in a 20 year. Amortized mortgage with an adjustable rate

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CAELI RIDGE: will be the same. You're just gonna take that rate. and whatever the the outstanding balance was, let's say that that you just made the interest only which you should be doing based on on this conversation.

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CAELI RIDGE: So the balance that you started with is going to be the same balance at the end of the 10 years. Okay? So you take that number

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CAELI RIDGE: and the interest rate you started with and just simply amortized it over the remaining 240 months, and that'll give you what your new principal and interest payment will be.

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CAELI RIDGE: And there's variables right there. I mean, there can be differences in in the loan terms. You have to know what you're looking at. When you start the loan. I can certainly help with that

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CAELI RIDGE: if and when the time comes, send it by me, and and we'll look at it together, and I'll help you.

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CAELI RIDGE: disactor or decode if you will.

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Karlie Libby: Awesome. Well, that's that's it for the questions in the chat.

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CAELI RIDGE: Okay, well, you guys thanks so much for being here as always, really really appreciate your participation. It. It makes it fun for me. And I think we covered everything else. It's gonna be on the first and third Tuesday, going forward, starting in September. So just be aware that that second, fourth Tuesday of the month, as it were. I'm gonna be off. I'm it's gonna give me more time to

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CAELI RIDGE: to make the content a little bit more fluid and useful for you, I hope, and if there's any topics that we have not covered, that we want us to recover, please let us know. Oh, and the all in one master class. We'll we'll carly. We'll have to figure out when we want to do that. And it might take me a couple of weeks months to put it together. But

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CAELI RIDGE: we'll get that out for you guys. Asap it seemed like it was a resounding yes. and yeah, we're here on standby gang. If you have any questions you need us for anything you know how to reach us.

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CAELI RIDGE: Thanks for being here

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CAELI RIDGE: bye. People.

Calling All Real Estate Investors

Amortized vs. Interest Only Loans

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