How an Interest Only Mortgage Can Actually Make You Money!

What's the first thing most people say about interest only loans? You may be saying to yourself right now, why would you do an interest only loan, pay nothing but interest, and never pay down your loan? You'll never pay off your loan, you'll pay more, and the lender cashes in big time, right? Wrong!

First of all, interest only options are usually only for 5 years, after which the remaining balance is amortized over 25 years and you'll pay the loan off in 30 years anyway. Secondly, being on an interest only plan, doesn't mean you can't also pay towards principal as you wish. But, let's get into the real reason why you may want to take an interest in interest only loans. They can make you money.

The average American lives in a home just under 5 years before moving into something else. The days of people living their entire lives in one place are over, and it's rare for people to stay put for too long these days. A topic for another report is why an ARM is much better than a 30 year fixed loan in this case, but let's focus on interest only.

If you're the average American, you'll be in your home 3-5 years before moving again. How much principal will you pay down in 5 years? I'll tell you. If you financed $150,000 at 6%, about $149 of your $899 payment each month goes towards principal. You'll end up paying about $10,000 towards principal over 5 years, so instead of owing $150,000, you'll owe $140,000. Sounds great, doesn't it? But, how does that benefit you?

Think about it...putting money towards principal is like putting money into a non-interest baring savings account, or simply putting money under a mattress. You pay in and it helps add to your equity. It's a part of your net worth, but you can't touch it, use it, and have it grow for you. The home will appreciate in value whether you pay down principal or not, and that's where your wealth is created. Paying down your principal only moves money from your monthly budget into your home's equity. Again, it's part of your equity, but it just sits there doing nothing for you. The only way to access that money is to either sell, or take out an equity line of credit, which you'll pay interest on again.

When you sell, you'll have that extra $10,000 in equity to help you make your next purchase, but you'd have the same amount of money if you put those principal payments in a shoe box and used that towards your next purchase. Paying principal is nothing more than a savings account that does not pay interest...just like paying extra in income taxes for that year-end refund. Money you can't touch that doesn't earn interest.

Now, if you were in an interest only mortgage, you'd pay $149 less per month on your mortgage payment, leaving you the opportunity to make better use of that $149. A good use of that money may be to put that $149 per month into an interest earning account or some other investment, or use it to pay off your high interest credit cards, etc. You can put that money to better use than just paying down your loan. We can't give you financial advice on what to do with that money, but it stands to reason that putting that money to work for you is better than not, and that you'll actually make money from earning interest.

Again, paying down your principal is like putting money in a shoe box, except you don't have access to it unless you sell, or take out an equity line of credit, which you pay interest on again. Paying interest only and then using the savings to pay down high interest debt or earn interest in other accounts, you take full advantage of your monthly budget and come out ahead.

If you'll only be in the house 3-5 years, or if you have to take a mortgage with high rates due to a current troubled credit situation, you'll want to consider an interest only loan so that you can put your money to work for you in other areas, and lower your payment.

You only want a 30 year fixed loan when you'll be there for 7+ years, and you only want to pay towards principal when you don't feel you can put that money to better use elsewhere. Taking the savings you'll have by not paying towards principal...if you can make that money grow through interest earning investments, or reduce high rate debts, you'll come out ahead over paying down the loan and actually make money.

We can get into more complex thinking in that if you actually like being in the adjustable periods of ARM's, then paying down principal makes sense, but most people are not in positions that they can afford to be in a fluctuating payment loan. While ARM's will save you money long term, it's not for some people, and that's another topic. But for most, whether you're in an ARM or fixed loan, you'll be in a fixed rate/payment period, because ARM's have an initial fixed rate/payment period. So, given a fixed period, reducing your loan size won't change your rate or payment amount. With that said, there's no advantage to paying down the principal other than just knowing you have that equity sitting there...doing nothing for you.

It's a different way of thinking for most, but it makes a lot of sense if you use that savings towards good. If all you do is blow the savings, then don't go interest only. Every situation is different, so let's discuss your situation and see if this is right for you.

I hope you have enjoyed this special report. We currently have over 40 creative loan programs to fit your needs. Please contact us at 203-483-0061 to set up your FREE No-Obligation consultation where we will meet to tailor a program to fit your needs and comfort levels for monthly payment and investment.

Sincerely,
Chris Rivers
Chrysalis Funding
150 W. Main Street
Branford, CT 06405

Phone: 203-483-0061

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