With interest only payments, the cash flow requirements of a private mortgage tend to be lower than a fully amortized payment from a conventional lender, even though the conventional lender’s interest rate may be substantially lower.
Private lenders prefer interest only payments in most cases as it maximizes their return on investment as interest is always being earned each month on the full amount of principal advanced to the borrower.
But there are also cases where the borrower does not have sufficient cash flow to pay even an interest only payment.
In these situations, a private lender may consider prepaid interest whereby an interest reserve or allowance is deducted from the face amount of the mortgage and held in trust by the lender to cover off the monthly interest costs as they are incurred.
Prepaid interest can be for all or part of a private mortgage term. The key to being able to qualify for prepaid interest with a lender is for the borrower to have sufficient equity in the property in order to leverage a higher loan amount that can provide for the cash requirement of the borrower as well as fund the prepaid interest requirement.
The third option is a principal and interest payment, either fully amortized like you would have with a bank or institutional lender, or some other form of principal portion, being it a fixed amount each month, or a lump sum at the loan anniversary date if the term is more than one year, or some other variation.
From the private lender’s point of view, an amortized principal and interest payment can be required with higher risk lending scenarios to increase the speed of repayment of the mortgage and reduce the lender’s risk of loss in the process.
From a borrower’s point of view, if he or she has good cash flow, but can only qualify for a private mortgage due to poor credit or some other reason, then paying down the mortgage as fast as possible through an amortized payment may be preferred.
If you would like to know more about private mortgage payment options available to you, I suggest that you give us a call and and a member of our team will get all your questions answered right away.