| Interest Only Mortgages |
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Why Smart
Investors Like
Interest Only
Mortgages: The
Interest Rate Is
Key
Investors Like
Interest Only
Mortgages: The
Interest Rate Is
Key
Interest Only
Mortgage:
Quicksand To
Borrowers
Mortgage:
Quicksand To
Borrowers
An interest only mortgage is a way of
borrowing more and paying less monthly
payments. To protect your house from
possible default and foreclosure, this
strategy should be considered only in the
short term. The interest rate is the key to
the puzzle.
Remember that in a traditional amortized
mortgage, you are paying the principal and
interest. The interest part can be
considered the fee or cost of the loan.
Remember that an interest only mortgage
has a specific period where there are
interest only payments. The period could be
5 years, 10 years or sometimes 15 years.
After the period is up the typical amortized
mortgage payments are in effect, namely,
principal and interest.
Let's look at an example. The mortgage
amount is $300,000 and the interest rate is
5.5%, and the term is 30 years. In a
traditional amortized mortgage the monthly
payment will be $1,703.37, representing
principal and interest. In an interest only
mortgage the monthly payment will be
$1,375. This is a savings of $328.37 a
month. After 5 years of payments the loan
amount remains the same at $300,000. If
the borrower had selected a traditional
amortized mortgage, $19,702.20 would
have been knocked off the mortgage
balance.
In the above example, the borrower can get
a bigger house since he is excluding the
principal payments. There is one 'tick' in an
interest only mortgage that lenders usually
speed pass when they sell the product. At
the end of the interest only period, 5 years,
there are 25 years left on the 30 year
mortgage. When the new payment is
calculated, we use the 25 year amortization.
This puts the monthly payment at $1,842.26,
an increase of $467.26..
There are specific situation where a
borrower can use an interest only mortgage.
One situation is where a borrower expects
a substantial raise in pay, or he is getting a
cash settlement. The expectation or more
money is the key factor and it must be
guaranteed. The first part of the loan, the 5
year period for example, would be interest
only, and after that a regular amortized
mortgage would kick in.
Two other situations would be for people
who want to flip the house or refinance
before the interest only period expires.
Interest only mortgages are bad when you
are underwater with your mortgage. Let's
look at the example in this article. We
started with $300,000 and if the house is
only valued at $250,000 after 5 years, we
still owe the original $300,000.
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borrowing more and paying less monthly
payments. To protect your house from
possible default and foreclosure, this
strategy should be considered only in the
short term. The interest rate is the key to
the puzzle.
Remember that in a traditional amortized
mortgage, you are paying the principal and
interest. The interest part can be
considered the fee or cost of the loan.
Remember that an interest only mortgage
has a specific period where there are
interest only payments. The period could be
5 years, 10 years or sometimes 15 years.
After the period is up the typical amortized
mortgage payments are in effect, namely,
principal and interest.
Let's look at an example. The mortgage
amount is $300,000 and the interest rate is
5.5%, and the term is 30 years. In a
traditional amortized mortgage the monthly
payment will be $1,703.37, representing
principal and interest. In an interest only
mortgage the monthly payment will be
$1,375. This is a savings of $328.37 a
month. After 5 years of payments the loan
amount remains the same at $300,000. If
the borrower had selected a traditional
amortized mortgage, $19,702.20 would
have been knocked off the mortgage
balance.
In the above example, the borrower can get
a bigger house since he is excluding the
principal payments. There is one 'tick' in an
interest only mortgage that lenders usually
speed pass when they sell the product. At
the end of the interest only period, 5 years,
there are 25 years left on the 30 year
mortgage. When the new payment is
calculated, we use the 25 year amortization.
This puts the monthly payment at $1,842.26,
an increase of $467.26..
There are specific situation where a
borrower can use an interest only mortgage.
One situation is where a borrower expects
a substantial raise in pay, or he is getting a
cash settlement. The expectation or more
money is the key factor and it must be
guaranteed. The first part of the loan, the 5
year period for example, would be interest
only, and after that a regular amortized
mortgage would kick in.
Two other situations would be for people
who want to flip the house or refinance
before the interest only period expires.
Interest only mortgages are bad when you
are underwater with your mortgage. Let's
look at the example in this article. We
started with $300,000 and if the house is
only valued at $250,000 after 5 years, we
still owe the original $300,000.
Readers of this article also liked:
Strategic Default Will Continue To Kill...
My Community Mortgage From Fannie...
Interest only mortgages are best suited
for savvy investors and wealthy
homeowners. This kind of mortgage grew
out of the jumbo mortgage markets.
Borrowers typically would use the
principal of the loan is invested for a
better return. Because these are jumbo
mortgages the monthly amounts available
for investments could be substantial. For
example, on $900,000 at 5.5% the
monthly payment on an interest only
mortgage is $4,125. For a fully amortized
mortgage, the payment would be
$5,110.10. As you can see, the borrower
will have $985.10 to invest each month.
Cash flow is a great benefit.
The 'savvy' investor can be conservative
and buy a Certificate of Deposit. The
interest rate is low so there won't be a
tremendous return. The stock market is
another choice. This carries more risk, but
it offers greater rewards. Another option
for investing is municipal bonds.
My favorite investment option for the
interest only mortgage is the real estate
market. Many investors buy a second
house and rent it. They use the cash flow
to offset any unforeseen expenses
associated with the rental property.
The benefit that attracts the majority of
homeowners to interest only mortgages is
the tax deductible feature. In our example,
the interest for the year was $49,500.
Let's assume that our homebuyer is in the
33% tax bracket, he would get a tax
benefit of $16,335.
Regardless of what type of mortgage you
decide on, make sure to do your
homework.
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for savvy investors and wealthy
homeowners. This kind of mortgage grew
out of the jumbo mortgage markets.
Borrowers typically would use the
principal of the loan is invested for a
better return. Because these are jumbo
mortgages the monthly amounts available
for investments could be substantial. For
example, on $900,000 at 5.5% the
monthly payment on an interest only
mortgage is $4,125. For a fully amortized
mortgage, the payment would be
$5,110.10. As you can see, the borrower
will have $985.10 to invest each month.
Cash flow is a great benefit.
The 'savvy' investor can be conservative
and buy a Certificate of Deposit. The
interest rate is low so there won't be a
tremendous return. The stock market is
another choice. This carries more risk, but
it offers greater rewards. Another option
for investing is municipal bonds.
My favorite investment option for the
interest only mortgage is the real estate
market. Many investors buy a second
house and rent it. They use the cash flow
to offset any unforeseen expenses
associated with the rental property.
The benefit that attracts the majority of
homeowners to interest only mortgages is
the tax deductible feature. In our example,
the interest for the year was $49,500.
Let's assume that our homebuyer is in the
33% tax bracket, he would get a tax
benefit of $16,335.
Regardless of what type of mortgage you
decide on, make sure to do your
homework.
Readers of this article also enjoyed:
Foreclosures: Squatters Rejoice In
New...
Stated Income Loans For
Self-Employed...
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