Have you heard about all the bad press about Cash Flow ARMs and all the other kinds of loans that contains options where your loan balance increases over time? Much of it is warranted! This loan is a tool and just like any tool, there is a right way to use it and an incorrect way!

Most people that get Pay Option ARMs do it simply to get a lower payment on the house that they live in. They couldn’t afford it any other way. They finance the house to the hilt and suddenly they get upside down when that balance starts to increase!

Pay option ARMs are a good choice when your home is seeing good appreciation (5% or more) because this type of loan has the ability for negative amortization (the loan balance can actually increase over time). In this case the amount of appreciation will easily out pace any increase in the loan balance.

Smart Loans are good for houses that you are financing under 90% of the appraised value or purchase price. In quickly appreciating markets you can get away with a higher amount but leaving 10% equity in the property is bare minimum. Why? Well, ff you get rid of the property through traditional channels, your selling expenses could be anywhere from 9-15% of the sales price! No one likes the possibility of coming out of pocket to sell a house! You want to make money!

Real estate investors will discover some of the largest benefits in using Cash Flow ARMs. When you take a house that meets some of the criteria discussed earlier, using pay options will afford you the following:

1. Payment Flexibility – Just like the name of the loan states, you have different payment options. One, you have the payment based on the start rate of the loan (which could be as low as 1%!). Two, you have the interest only payment. Three, there is an option to make a payment based on a 30 year term. Lastly, the fourth pay option is based on a 15 term. The last 2 pay options allow you to pay down on principle if you choose.

2. Maximize Cash Flow – Cash flow is the name of the game when dealing with buy and hold property and pay option ARMs are one of the best methods to increase it. Used correctly, cash flow ARMs can DOUBLE the income on your rental property!

3. Minimize The Cost Of Vacancies - Anyone who owns investment property has had vacancies. If you haven’t yet, just wait you will! One single month of vacancy, property dependent, will nearly wipe out the cash flow for nearly a year! Don’t believe me? Go ahead and tally up the holding expense for carrying the loan, utilites, cleaning, and a little maintenance and repair and see what you get. If you had a way to reduce the biggest expense, the mortgage, by a third, wouldn’t that ease the pain? Again, pay option ARMs are the answer!

4. No more worrying about surprise maintenance costs – In the same line as the vacancy example, you will be better able to minimize the effects of an surprise repair because your revenue has over doubled.

5. Give incentives to residents for good "behavior" – You can get very creative here. Credit for paying before the beginning of the month (for example, payment by the 25th). Discounts on longer term leases such as an 18-24 month lease, etc. The extra revenue from using a pay option ARM can smooth out you tenant churn and give you ability to assist you with tenant retention, particularly in a renters market!

6. Leverage the house to consolidate personal debt – If your earnings from obtaining a cash flow ARM goes from $250 to $500 a month, you can utilize that extra money to consolidate your car, credit cards, student loans, whatever.

7. Save the additional revenue to purchase more property! – You will be able to use pay option arms to buy even more property! That way your business starts to feed off of itself without you needing to use your the earning from your 9 to 5 to finance it!