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.
