The main facts of Interest Only Mortgages – Step right up! Purchase the home of your dreams with a mortgage only mortgage! you will get a low mortgage payment, and you will maximize your tax deduction, all on your current income. Sounds good, right? Sure, but there is significantly more you need to know before you get an interest only mortgage. For starters, the name is misleading. There’s no such thing as an interest only mortgage, because eventually you will have to pay the loan principal as well. What you are really getting is an interest only payment method which can be along with any type of traditional mortgage.
The other thing you will want to bear in mind is the advantages are way overblown. The standard payment on a 6%, $100, 000 loan is about $600, of that, $500 is interest, saving you simply $100 per month. Furthermore, not paying any principal now implies that you will pay more interest later. We’ll say some more about the real cost of interest only payments later in this article. Some History – Interest only payment mortgages are not a brand new offering. Rather, like many innovative methods, they originally grew out from the less rigid and more inventive jumbo mortgage markets.
- As such, they were typically aimed at well heeled, savvy investor type clients who preferred to use what would have been the main part of their payment for other, hopefully more productive investments. Since they were mostly jumbo loans, obviously the distinction in monthly payment grows with the largest loan amount. The $100 per month difference in the $100, 000 example above grows to $1, 000 per month on a $1, 000,000 loan, that is a considerable amount of cash which might be put to better use. For instance, while real estate might produce a return of the rate of inflation plus a number of percentage points, putting that money to work in the stock market instead could offer much higher returns.
A savvy investor might just be capable to grow his investment very handsomely in a short period, leveraging their incomes to build asset strength. That is a feasible use of interest only payments, but naturally there are risks, particularly in stocks. Nevertheless, the kind of savvy investor type people we are speaking about here typically has assets sufficient to compensate for any risks of not paying off their houses if they need to sell or refinance. Their risk is less than yours or mine will be. Most interest only payment schedules are offered on Adjustable Rate Mortgages, but they can be found on a fixed rate mortgage as well. They have also entered the mainstream, in order that they are available to just about all borrowers. The loans you will find will more than likely be sold to a secondary market dealer, so let us look at Fannie Mae’s program. Way back in the year 2001, Fannie Mae began buying from lenders an intriguing version of a FRM featuring interest only payments.