Monday, May 08, 2006

Option Arms: Investors Should Know

It's been a long time.... I shouldn't have left you..... without a tight beat to step to.....

- Timbaland & Aaliyah

Negative Amortization Loans

I dont know about you but all I have ever heard about Option Arms is well, negative. I am not here to convince you to go out and get a negative amortization loan for a real estate investment but for those of you that dont know how they work I want to give you a macro look at the investment. The Wall Street Journal had a great article covering this. Think of it this way and very simply:

If the deferred interest is less than the appreciation of the home, you win.

If the deferred interest is more than the appreciation of the home, you lose.

However the greatest benefit to a negative amortization loan is the cash flow of the loan. I could spend the next several minutes explaining why so many investors exploit this great loan. But if you dont take the time to work out the numbers, then how will you ever know if the loan is bad or not? I urge you to study this loan, its good and its bad.

Key Secrets to make the ARM a great investment

1. Never buy an investment that doesn't cash flow.
2. Buy your property in an appreciating neighborhood. If the appreciation is at least 3% a year, a real act of "nature" would have to occur in order for one to not make money with this loan. Regardless of rate hikes.
3. Make an interest only payment once a year, and pay the min payment the other eleven.
4. Set a limit interest rate. Of course if you get in at a 6.2% interest rate, and rates are rocketing upward, make a limit according to your return projections.
5. This loan works best on cash flowing apartment buildings.

Love it or hate it, the option arm is here to stay and many investors take advantage of it.

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