Creative RE Financing
Creative Real Estate Financing Options and the Interest Only Loan
By Buyincomeproperty.com
Oct 20, 2005, 00:57

Creative real estate financing has become a way for people to afford more expensive homes that they might not ordinarily have qualified for. But are these creative financing options really as good as they sound? Before you step off into a creative home financing loan of any kind, be sure that you fully understand the program, the payment and terms, and the long-term impact this is going to have on your ownership.

The fact that lending has become a competitive market has led to an increase in creative real estate financing options. No money down, interest only and balloon payments are among the creative home financing mortgage companies offer in an attempt to attract customers. Some people will simply take a deal they believe they can afford that will get them into the house of their dreams as quickly as possible. But remember that even the most creative mortgage financing plan isn’t worth much if it doesn’t allow you long-term ownership.

There are several options for creative real estate financing. Here’s how interest only loans work.

The borrower takes out a loan for a specific amount – usually the price of the home. On a traditional loan, you’d make a payment each month, with some amount going toward the interest on that loan and some toward the principal. The interest only loans require you to only pay on the interest, but that means that the principal remains the same. In effect, you can pay on a $100,000 home loan for 10 years or more, and still owe $100,000. Creative financing? Absolutely!

The majority of people who choose this method of creative real estate financing have good intentions – they’re planning to pay a specific amount on the principal with each payment. The terms of this kind of creative real estate financing usually allow the borrower to pay any amount they wish toward the principal.

The benefit of the interest only creative financing option is that the borrower can make a payment toward the principal anytime they want, but can pay the lesser amount if they experience a cash flow problem. The problem is that most people tend to live at the edge of their finances and forcing themselves to make that payment toward principal often seems like an option that can be put off in favor of some other expenditure.

So is this a creative real estate financing option that should be avoided? There are some instances in which this is an excellent choice among the creative financing plans. If you plan only to live in your house for a limited amount of time – a year or two – this will put you in a good home with less expensive payments. You’ll likely get your investment back at the time of the sale. The interest in this case may be compared to paying rent, though there’s the chance that you’ll gain some equity during your time in residence, all because you worked out a creative financing plan.

If you plan to flip the house fairly quickly, this creative real estate financing could also be a good option. An interest only loan will give you smaller payment while the house is being renovated and put back on the market.