I have a new favorite mortgage. It's fairly new- at least to my knowledge, this mortgage has only been around a couple of years.
The Fannie Mae 10-year Interest Only ARM.
Now, many people will tell you that "interest only" home loans are no good...including a recent issue of Newsweek that I read.
I am unclear as to why people are so against the interest-only mortgage; for some people, it is an ideal loan. In fact, I think it's an ideal loan for a lot of people.
This is why people don't like interest-only mortgage loans: Because when you move out, you won't have any equity! This is terrible! So many people are going to move out of their homes and not have any equity at all! Oh, it's the end of the world...woe is me.
Hasn't anyone (who hates the interest-only mortgage) ever heard of appreciation? The average homeowner stays in their home for 7 years, according to recent data. Do you know how much equity you actually pay down in the first 7 years? Well, for those of you that have never seen an amortization schedule, I'll just answer that question: Not much. You start doing well after about 15 years. Not planning on staying in your home for fifteen years? Most of what you'll be collecting is appreciation.
Plus, who is stopping you from paying down your mortgage anyway? When I have clients that are interested in an interest only loan, I supply them with the P&I payment. I tell them, "This is what you should pay each month if you want to pay down your home."
Nothing stops an interest only borrower from completely paying their home off in 30 years, unless they don't want to of course.
So than, if we are going to pay the house off, why bother with an interest-only loan at all? Because in December, when times might be a little tight for Realtors and folks who just might like to buy a lot of Christmas presents, the interest-only payment is available as a less expensive option. You normally send in $1500 per month, but in December, you just send in the required interest of $1100. It's as if it gives you a little breathing room in case you ever need it.
Other reasons why one might want an interest only home mortgage:
1. I have an investment property with tenants. The interest only loan is ideal for me because it actually allows the rent I collect to cover my mortgage. Gee whiz, I'm not paying down my $200,000 mortgage that I only plan on keeping for a couple-few years. Well, the house is currently appraising at $300,000 so what do I care?
2. Perhaps you are going to be earning more money in the future? Right now, you are just a surgical resident, but in a couple of years you'll be a surgeon. Take the low payment at first and than start sending in big hunks towards your loan's principal when you become a surgeon. Or maybe your wife is in law school right now. Maybe both of you are. Interest only loans are perfect now and will still be perfect when you graduate.
3. More money to pay off other, higher interest debt when needed. Why pay down your mortgage if you have $25,000 on a Nordstrom's credit card at 28% interest? Pay off higher interest debt first, than work on your principal. Got a mortgage at 6%, a car payment at 8.99% and a credit card at 16%? And you want to send money to your mortgage note holder? No way! Forget the principal for now. Pay down that other stuff first. An interest only mortgage allows you financial flexibility.
Of course, there are some disadvantages to an interest-only mortgage, just not as many as the naysayers would have you believe. Also, there are many different types of interest-only mortgage loans: I specifically endorse the Fannie Mae, 10-year, interest-only ARM based on my experience.
Wondering if an interest only mortgage is right for you? Feel free to email me at karen.george@azwm.com
This page is an extension of my AR Profile / Web Site.
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Are you looking for a Realtor? Find a Realtor here or add yourself to my Find a Realtor page if you are an ActiveRain Realtor. Or, if you are looking for an interest-only mortgage, please visit Arizona Mortgage.
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Karen,
I do agree with your points that IO loans can be good for certain kinds of people, but I don't suggest this type of product to most of my clients. Most of the reason is because most of my loans come from purchases. In 5 years most of my clients regardless of my advice end up paying only interest only. Or they rack up their credit cards again after they were paid off in a refinance. I offer my clients debt repair programs (non loan advice), wealth building advice, and how to stay out of debt. You can lead a horse to water, but you can't make them drink. In my experience, they will rack their debt back up and continue to pay only the interest payment.
When I close a loan I tailor it to what makes the most sense for them and sometimes that does include an interest only option. But that is usually when I'm doing a debt consolidation loan or working with an investor or working with a very payment senstive borrower (and even then I still push a P&I payment).
Most of my borrowers want to pay P&I because they want to pay off their mortgage in full, not recast their loan after 10 or 15 years and pay a higher mortgage because they are done with their IO payments. Most of my borrowers want to own their house, and the reality is a large portion of people just don't have the discipline to pay extra.