Is An Interest-Only Loan The Best For Me?Jan 26, 2018
Most home loans payments will pay the principal-and-interest in the home. This means that your regular payments will reduce the principal (amount borrowed) as well as paying off the interest. With an interest-only loan, you only pay interest on the amount you have borrowed for an agreed period of time (usually up to 5, 7 or 10 years).
What does an Interest-Only Loan will offer you?
Lower Monthly Payment: Because you are paying the only the interest on the loan, your monthly payment is lower.
Payment Flexibility: When you have an interest-only loan, it gives you the flexibility to either make your interest-only payment or put an additional amount that goes to the principal.
Free Up Money: Because your payment is significantly lower than a fully amortized payment, this frees up money for other things. The smartest way to use the money that you have freed from paying towards your house is to put it towards investments that will provide you a good return.
The reason I share this with you is that there are low risks, tax-exempt investments that on average give you a rate of return of 8% which is more than what you get on the annual appreciation of your home. Based on statistics and depending on where you live it could be about 4.10% on average annually.
Who should consider an interest only loan?
- Someone that has a 65% Loan-To-Value or at 35% or more in Equity in their home.
- Someone that needs to free up more money to use it to grow their money.
- Someone that rather have a lower monthly payment.
- Someone that knows that can get significantly a higher rate of return by investing their money elsewhere.
- Someone that is retired and have too much equity in their home and doesn’t want a Reverse Mortgage.
- Someone that has debt and wants to get rid of it faster as they also invest their money and/or prepare for retirement.
- Someone that wants to maximize their tax deductions benefits.
- Someone that is buying an investment property to get a higher cash flow, and offset vacancy periods. (Most likely this will be a portfolio loan, not a traditional I/O loan)
(I would suggest pulling as much money out first up to 65% LTV and do an interest only after that, all before they fully retire) This way you can benefit from the equity you accumulated in your home. Trust me, your equity is not going to protect you in case of emergency, it is not going to pay your medical bills and it is not going to pay your funeral expenses.
Who should NOT be getting an interest only loan?
- Someone with less than 30% equity in their home.
- Someone that is it not good or discipline at managing their money.
- Someone that is not going to use the money on investments with a higher rate of return.
- Someone that wants a bigger house that they cannot afford on a fully amortized payment.
- Someone extremely conservative that his/her only focus is to pay off the home.
I have provided you both side of the spectrum so you can make an informed decision. Of course, always consult with your Accountant, Financial Advisor or a Mortgage Expert before making a decision.
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