How an Interest Only Mortgage Can Actually Make
You Money!
Special Report From No Down Payment Mortgage
What's the first thing most people say about interest
only loans? You may be saying to yourself right now, why
would you do an interest only loan, pay nothing but
interest, and never pay down your loan? You'll never pay off
your loan, you'll pay more, and the lender cashes in big
time, right? Wrong!
First of all, interest only options are usually only for
5 years, after which the remaining balance is amortized over
25 years and you'll pay the loan off in 30 years anyway.
Secondly, being on an interest only plan, doesn't mean you
can't also pay towards principal as you wish. But, let's get
into the real reason why you may want to take an interest in
interest only loans. They can make you money.
The average American lives in a home just under 5 years
before moving into something else. The days of people living
their entire lives in one place are over, and it's rare for
people to stay put for too long these days. A topic for
another report is why an ARM is much better than a 30 year
fixed loan in this case, but let's focus on interest only.
If you're the average American, you'll be in your home
3-5 years before moving again. How much principal will you
pay down in 5 years? I'll tell you. If you financed $150,000
at 6%, about $149 of your $899 payment each month goes
towards principal. You'll end up paying about $10,000
towards principal over 5 years, so instead of owing
$150,000, you'll owe $140,000. Sounds great, doesn't it?
But, how does that benefit you?
Think about it...putting money towards principal is like
putting money into a non-interest baring savings account, or
simply putting money under a mattress. You pay in and it
helps add to your equity. It's a part of your net worth, but
you can't touch it, use it, and have it grow for you. The
home will appreciate in value whether you pay down principal
or not, and that's where your wealth is created. Paying down
your principal only moves money from your monthly budget
into your home's equity. Again, it's part of your equity,
but it just sits there doing nothing for you. The only way
to access that money is to either sell, or take out an
equity line of credit, which you'll pay interest on again.
When you sell, you'll have that extra $10,000 in equity
to help you make your next purchase, but you'd have the same
amount of money if you put those principal payments in a
shoe box and used that towards your next purchase. Paying
principal is nothing more than a savings account that does
not pay interest...just like paying extra in income taxes
for that year-end refund. Money you can't touch that doesn't
earn interest.
Now, if you were in an interest only mortgage, you'd pay
$149 less per month on your mortgage payment, leaving you
the opportunity to make better use of that $149. A good use
of that money may be to put that $149 per month into an
interest earning account or some other investment, or use it
to pay off your high interest credit cards, etc. You can put
that money to better use than just paying down your loan. We
can't give you financial advice on what to do with that
money, but it stands to reason that putting that money to
work for you is better than not, and that you'll actually
make money from earning interest.
Again, paying down your principal is like putting money
in a shoe box, except you don't have access to it unless you
sell, or take out an equity line of credit, which you pay
interest on again. Paying interest only and then using the
savings to pay down high interest debt or earn interest in
other accounts, you take full advantage of your monthly
budget and come out ahead.
If you'll only be in the house 3-5 years, or if you have
to take a mortgage with high rates due to a current troubled
credit situation, you'll want to consider an interest only
loan so that you can put your money to work for you in other
areas, and lower your payment.
You only want a 30 year fixed loan when you'll be there
for 7+ years, and you only want to pay towards principal
when you don't feel you can put that money to better use
elsewhere. Taking the savings you'll have by not paying
towards principal...if you can make that money grow through
interest earning investments, or reduce high rate debts,
you'll come out ahead over paying down the loan and actually
make money.
We can get into more complex thinking in that if you
actually like being in the adjustable periods of ARMs, then
paying down principal makes sense, but most people are not
in positions that they can afford to be in a fluctuating
payment loan. While ARMs will save you money long term, it's
not for some people, and that's another topic. But for most,
whether you're in an ARM or fixed loan, you'll be in a fixed
rate/payment period, because ARMs have an initial fixed
rate/payment period. So, given a fixed period, reducing your
loan size won't change your rate or payment amount. With
that said, there's no advantage to paying down the principal
other than just knowing you have that equity sitting
there...doing nothing for you.
It's a different way of thinking for most, but it makes a
lot of sense if you use that savings towards good. If all
you do is blow the savings, then don't go interest only.
Every situation is different, so let's discuss your
situation and see if this is right for you.
|
