The problem with those type of loans is they are very dangerous in the wrong hands they can have huge negative consequences. The people that I have worked with that were attracted to the negatively amortizing loans, etc. typically had inconsistent income. This would be self-employed people, general partners, commission only sales people, and people that have incomes affected by seasonal factors. These people benefit from having a smaller regular or required payment for these times when the cash-flow is low, but then can make significant principle payments when the cash is there. I think this is where the â€œaffluent borrowerâ€ label comes in; the reality is incomes that are less regular are also typically much greater as well. Interest-only or negativity amortizing loans given to borrowers who just want lower payment is a disaster in the making.
A few examples of borrowers Iâ€™ve done these type of loans for are: 1) a lawyer who took a draw of $40,000 a year as a partner but whose partnership distribution was in the mid six-figures, 2) a business owner whose business ran in the red for 10 months out of the year but made well over $200,000 during the Christmas shopping season, and 3) a high-steel construction worker who made over $150 an hour but would go long periods of no income when the weather was bad; he still made over $100,000 a year.
Its not coincidence that people that understand money become affluent.
That is a very astute question. Any statement can be justified...it all just depends on perspective. I hope you find what it is you're looking for. Let me know if I can be of help in some way.
Century 21 Award
pay the rate when it adjusts to a fully amortizing loan over the remaining period, or
have either of 2 exit strategies in place:
1. Nimble: Sell the property regardless of profit or loss, or
2. Affluent: the ability to pay off the mortgage
The remaining option of re-financing the property is subject to several uncontrollable variables, not the least of which is the ability to qualify at current rates.
With these considerations in mind, I think it more accurate to characterize the effective use of the interest only loan as the domain of the sophisticated and experienced real estate operator than of one who is necessarily truly affluent.