Why Interest Only Loans Are BETTER Than Amortizing Loans
The only difference between an Amortizing Loan (principal and interest) and an Interest Only Loan is that the Interest Only Loan gives you more flexibility because you are only “required” to make the interest only payment every month. You can treat an Interest Only Loan just like an Amortizing Loan if you want by making the same principal payments every month. But, with an Interest Only loan, you don’t have to.
Here are some additional benefits to consider:
- When putting less than 20% and one has a 2nd mortgage, usually the 2nd mortgage has a higher rate. Therefore, by doing an Interest Only loan on the 1st, you can apply those principal payments you would have been paying on the 1st to the 2nd. This will save you more interest in the long run.
- Because you get a tax write-off on the mortgage interest, you could take those principal payments you would have been paying and invest them with a financial planner to earn a better rate of return. And because of compounding interest, you will likely come out much better in the long run. For example, if your rate is 6% and you are in the 28% tax bracket, that mortgage is really only costing you 4.32%. So, if you earn a better rate of return in the market than that, along with compounding interest, you would come out much better.
So, because you can treat the Interest Only Loan just like an Amortizing Loan by making principal payments every if you want, along with the other benefits regarding 2nd mortgages, tax write-offs, and compounding interest, there is really no reason to be afraid of Interest Only mortgages. They are actually better than Amortizing Loans because you have more options.
In the past, there were only a limited number of programs in which you could do an Interest Only Loan, but now almost every loan program includes an Interest Only option. For example, you can do a 30 Year Fixed Interest Only Mortgage. The rate is fixed for the full 30 Years, but for the first 10 or 15 years, you have the option of just making the Interest Only payment. After the 10 or 15 year Interest Only period, the loan will then go to principal and interest and amortize for the remaining term on the mortgage. There are also many other Interest Only programs including 10, 7, 5, 3, & 1 Year ARM Interest Only options. And as you go from 30 to 10 to 7 and so on, the rates typically get lower.
For more information and to discuss additional benefits of an Interest Only Loan or any other loan program, please call me or email me at the information listed.
Todd Crane
Certified Mortgage Planner
Office: 770-649-4921
