Interest Only Loans

To AMORTIZE means TO REPAY YOUR PRINCIPAL LOAN BALANCE AND INTEREST IN EQUAL MONTHLY INSTALLMENTS.   This is how most conventional mortgages are structured.  Many of you wouldn't have it any other way.  After all, who would want to pay on a mortgage for years and still owe the same amount as when they had first started?  Undoubtedly there are those of you for whom this sounds untenable.  And yet, many of you have that exact situation and don't realize it with your 2nd mortgage in the form of a home equity line of credit (HELOC).  Their interest rates are usually tied to the prime rate or a point or two above it and are "interest only" loans if you make the minimum payment.

So, who would want one of these "interest only" loans?  The answer to this question is a lot of very savvy people, that's who.  Why?  Because the payments are significantly lower than with a conventional amortizing mortgage since the borrower is paying only simple interest.  To illustrate, how substantial the differences in payments between an AMORTIZING MORTGAGE and an INTEREST ONLY MORTGAGE for the same $500,00 loan amount are $3149 vs. $2688, respectively. This example assumes an amortizing 30-year fixed rate 1st mortgage of $400,000 with an 80% LTV @ 6% and the 2nd is  for  $100,000 for 15 years @ 9% (payment $2398 + $1014 = $3412).  The "interest only" loan is for the same amounts and LTVs with the interest rates being  6% and  8.25%, respectively ($2000 + $687 = $2687). With an "interest only" loan you can either get more house for the same money or afford a home that you could not qualify for income-wise with an amortizing mortgage.

This affords one a unique situation wherein one can live in a home, have their entire mortgage payment be tax-deductible and at the same time have the property appreciation increase their equity between 5-8% per year.  If your FICO score's above 660 you too may wish to consider the same real estate dilemma that plagues modern-day Hamlets:  "To amortize or not to amortize, that is the question." 

Copyright 2020 Rod Haase.  All rights reserved.