Interest only mortgages - good things.
Other investments -
If the interest only payments are set for a fixed period of five years, a smart borrower could invest the payment differential in a cash investment... like a CD, at an interest rate of perhaps 2% for the period. Over the five year fixed-rate period, that regular stream of deposits would grow nicely. At the beginning of the sixth year, should the mortgage rate increase, the additional amount due each month could be drawn from this "growth account." That way, the borrower would have no budget issues for a period of 44 months. And, this is assuming just a 2% return over the 5-years. If a borrower could locate a higher return over that period, that "savings support" could last longer.
Invest the savings in home improvement -
Another worthwhile use for the "extra" cash that an interest only mortgage provides would be to improve the home itself. Let's say you have a $200 per month savings. This would allow you to invest up to $1,800 per year in improvement projects which can increase the value of your home. Now, this may not buy a totally brand new kitchen or bathroom, but might be enough for an impressive remodel, a new roof, flooring upgrade, new energy-efficient windows, or outdoor decking, to name just a few. (A pool could be fun, but usually doesn't pay for itself in an improved sales price.) Improving the value of your home may mean a higher selling price or appraisal (for future refinancing) as well as some enjoyment now.
Funds for tuition -
Financial planners and investment experts will advise you that perhaps the most important component of an investment is the length of time over which interest may compound. This can be especially true if you have young children you wish to send to college; the earlier you can commit money to an investment plan, the more likely you will be able to reach your educational funding goals. After the interest only period ends, you may not have additional money to commit to the savings plan, but the money already committed will have a longer compounding period.
Savings for retirement -
If you're an older homeowner and see retirement on the horizon. Or, if your children are grown and have left home, leaving you with a big house... and you think you may want to sell it in a few years... an interest only mortgage might work for you as well. If you've been in your home for a while, your loan balance has probably shrunk considerably; refinancing to a new mortgage... possibly a 12 MAT with interest only payments, could free up a substantial amount of money each month to maximize your IRA contributions or other "nest egg" investments.
When you have a seasonal income -
Not everyone in the work-a-day world brings home a regular paycheck. Those with seasonal incomes, or who get a good portion of their incomes from bonuses, tips or other sporadic payments, might also benefit from the lower payments that an interest only mortgage provides. This can allow the borrower to make a smaller payment when cash is tight, then accelerate payments... including principal... when more money is available. In this way, the borrower could end up with the best of both worlds.
The lowest possible payment -
With their "usually lower than fixed rate" interest rates, and coupled with interest only payments, an ARM (Adjustable Rate Mortgage)... especially a short-term ARM... could represent a way to have the lowest possible monthly payment, and still make it possible for you to own your own home. Some mortgage products, allow you to have your choice of payment plans, including interest only, fully-amortizing or accelerated-amortizing. These so-called, "12 mat", "option arms" or "pick-a-payment" mortgages are gaining in popularity, as they allow you to determine how best to apply your budget to your mortgage. These option arm products should not be confused with zero down, interest only loans, because they are not 100% financing products. The highest LTV (Loan-To-Value) available with any option ARM product offered by any lender in the country is 95%. So, to use an option ARM as a purchase mortgage, you'd need to have at least a 5% down payment.
If you think you're a candidate for an ARM, and if you have college, retirement or investment needs to take care of, you might consider adding interest only payments to your ARM in order to more fully fund the other financial needs in your life. You may believe your home will be worth more in the future... or that you can invest the money better elsewhere than paying down your mortgage balance. As far as maximizing your tax deduction, remember that not only is the vast majority of your payment already comprised of interest, but only a fraction of every dollar in interest you spend is tax deductible, anyway.
Interested in an interest only mortgage? -
Mortgage Match is the internet's leading website for interest only mortgages, and 12 MAT Option ARMs. The best way to have all your questions answered, and to determine if an interest only mortgage or 12 MAT Option ARM is right for your purchasing or refinancing needs, it's best to talk with a seasoned and experienced Senior Loan Consultant. You can have a friendly conversation, or schedule a free consultation by clicking here.
For more information on zero down, interest only mortgages, please also see...
Zero down, interest only mortgages and The Home Depot.
Interest only mortgages simplified.
Interest only mortgages... they're a good thing.
The benefits of getting preapproved for an interest only loan.
It's not that hard to get an interest only mortgage.
Why it's hard to quickly quote a rate on an interest only loan.
Zero down, interest only mortgages even with bad credit.
FAQs on interest only mortgages.
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