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What Is a Cashflow Mortgage?

By Kevin Landis

With our economy still struggling, many are finding that they are unable to make their rental or mortgage payments. When this kind of situation appears, some think about a cash flow mortgage.

What is a Cashflow Mortgage?

But, what is a cash flow mortgage? A cash flow mortgage is when all or most of the cash flow that comes from rental income is given to the lender. With this kind of transaction there is no stated interest rate. Cash flows that come from mortgages are discounted to the net present value.

An Example

Let’s say for example, that a building that is used for business purposes becomes financially unstable and unable to meet mortgage payments at a determined rate of interest. Instead of foreclosing, the lender makes an agreement to convert the mortgage into a cash flow mortgage. When this happens, all of the property’s net operating income is given to the lender for a certain period of time. So, the mortgage lender then receives all of the cash flow from the property.

More on Cashflow Mortgage

With this kind of mortgage, payments by the borrower are calculated on how available the cash flow is, and deferring the part of the debt that is unpaid until a certain amount of cash flow is available or until maturity.
In addition, the owner of a struggling property may also be able to sell the property to a third party for a price that is more than the existing mortgage, with the seller taking back a purchase money cash flow mortgage instead of cash. However, such an agreement has some legal or trouble areas that need to be addressed such as:

 Cash flow is determined by your income, tax breaks, minus expenses.
 There is uncertainty concerning tax deductibility of capitalized interest on an investment loan.
 It is impossible to know the future growth of markets and a cash flow mortgage depends on rising markets.

Keep In Mind

The main thing to remember with a cash flow mortgage is that when used, the debt will rise, making an increase in equity harder to reach. Common sense will tell you that repaying the debt is the best way to increase your equity. And, when you own your assets, that is when you become financially sound and secure.

Related posts:

1. How Does The Mortgage Lender Decide The Max Amount Of Loan I Can Afford?
2. What is the Cash Flow Adjustable Rate Mortgage?
3. Can I Get More Cash Back With A Better Refinance Rate?
4. What Is A Mortgage Forbearance?
5. Why Do Mortgage Rates Change?