Why interest only loans?

The loans on the properties are interest-only. An interest-only mortgage (offered as an adjustable-rate mortgage or ARM) is a type of mortgage in which the borrower is only required to pay interest on a loan for a certain period, typically 2 years. The principal is repaid in a lump sum or subsequent payments with a refinance or closing of the loan. Overall, this structure results in a higher cash flow to the investors given the monthly payment is significantly lower than a loan paying interest and paying down the principal.

Interest-only loans are structured as an adjustable-rate mortgage (ARM), and the ability to make interest-only payments can last up to 2 years. This mortgage usually results in lower rates than a fixed mortgage and a lower monthly payment.

In addition, the mortgages on the properties are non-recourse which is secured by the property (the collateral). If the case of a default, the mortgage issuer can only seize the collateral. Investors own 100% of the equity in the property, but there is no personal liability for this type of loan. Non-recourse debt is a type of loan secured by collateral, in this case, the property. If the borrower defaults, the issuer can seize the collateral but cannot seek the borrower for any further compensation, even if the collateral does not fully cover the value of the defaulted amount.

The ARM loan may include an initial fixed-rate period that is typically 5 to 10 years. The interest rate may change (adjust) each year thereafter once the initial fixed period ends. For example, with a 5/1 ARM loan for a 30-year term, your interest rate would be fixed for the initial 5 years and could fluctuate up or down each subsequent year for the next 25 years.