The Fundamental Question: Does An Interest Only Mortgage Save Me Money?
So here is an example of the math of a hypothetical 30 year mortgage compared to the same mortgage with an interest only option for the first 5 years.
$350,000 for 30 years fixed at 7.0%
The traditional payment, principal and interest, would be 359 payments of $2328.56 and 1 final payment of $2326.94 for a total of $838,279.98
That same mortgage making interest only payments for the first five years would give you 60 payments of $2041.61, then 299 payments of $2474.73 and 1 final payment of $2471.50 for a total of $864,616.97 for a difference of $26,336.99 .
While your payment during the first 5 years saves you roughly $287 per month, you will then pay almost $147 more per month for the next 299 months in order to pay the mortgage off by the end of the 30 year term.
Is this a good deal? Well, it can be under certain situations and there are some assumptions built in as well. First of all, most home buyers do not stay in the same home (not to mention the same loan) for the full 30 years. The balance of monthly savings will come at the expense of a higher payoff when you sell. Plan on refinancing? Again, since you have no idea what the prevailing rates will be, you cannot predict the benefit of financing a higher loan balance (since you have not paid down the principal) with a lower interest rate, EVEN IF IT IS AVAILABLE. Quick math, interest only for 5 years at 7% then refinance down to 6.5% for another 30 years would actually cost you $80,625 MORE than the original fully amortized 30 year mortgage. This does not included ANY points of fees of the refinance and it is typical to pay just a touch more (higher interest rate) for a mortgage with an interest only option.
A lot of math, I know. PLEASE PLEASE PLEASE consider how much saving a couple hundred dollars can cost you, and make an extra payment here and there to cut as much long-term interest as possible.
About the Author: Brian Piper is a Senior Loan Officer with East West Mortgage in Vienna Virginia, one of the largest brokers in the country. Also on the web at www.VirginiaLoanPro.com
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