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| Interest-Only Mortgage is Great, When Interest Rates are Up
By Mark Barnes Direct Lending Solutions Staff Writer
Uninformed people continue to preach the dangers of the interest-only mortgage. If one of these “preachers” is talking to you, turn a deaf ear, especially if mortgage rates are in an upward spiral. It’s likely not awe-inspiring news that home loan rates run in cycles. In 2005, interest rates dropped to all-time lows. Everyone seemed to be clamoring for fixed-rate mortgages, which made sense in most cases. Why take an adjustable rate mortgage or an interest-only home loan, if the fixed-rate mortgage is just as good. You lock in that wonderful rate, kick back and relax for the next 15 or 30 years. When rates are on the upward trend, though, the interest-only mortgage is a tremendous product to consider. In fact, the hybrid adjustable rate mortgage, with the initial interest-only feature, is often the best home loan in these circumstances. If you are one of those people who wants to steer completely clear of ARMs, though, look at what a basic interest-only mortgage can do for you. They usually offer interest-only periods for 10 to 15 years and convert to 30-year fully-amortized loans thereafter. If interest rates are high – say 6.5% for a 30-year fixed home loan, you might get an interest-only mortgage for 6.25%. The fully-amortized fixed rate payment on a $200,000 home is $1,231.43, whereas the interest-only mortgage payment is an even $1,000 – a savings of $231.43 monthly and $2,777.16 each year you keep this loan. This is a modest example, too. You may be able to find a lender with an interest-only home loan program that has a larger differential from the fixed-rate and the interest-only rate, saving you even more money. Those preaching the evils of the interest-only mortgage will tell you that you will never gain equity. This is absurd. You gain equity through appreciation in the value of your home and by putting extra money on the principal mortgage. The key to the interest-only loan is saving money in a time when rates are high. So, if you borrow $200,000 for a new home, and you can’t afford to pay much more than $1,000 each month, then the interest-only mortgage is a wise choice. The advantage the interest-only mortgage gives you over a fixed-rate mortgage is the huge difference in the payments gives you the option to pay more on the principal whenever you have extra money. When you are in the fixed-rate mortgage, you are already making a much higher monthly payment, so you lose the flexibility to pay more on the principal loan amount. So, you can see, the interest-only mortgage is an excellent product, when interest rates are in the dreaded upward spiral. Your best bet is to take the interest-only loan to begin, and when rates plummet, refinance to a lower rate. If interest rates are extremely low, and you intend to remain in your home for a long period of time, consider the fixed-rate at that time. Meanwhile, tell the “preachers” to remain in the pulpit, and send them here for their mortgage and financial information. Helpful External Resources:
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