Reasons to Consider an Interest Only Mortgage Loan

Many people never consider the option of an interest only mortgage loan. However, some significant reasons exist as to why individuals should entertain such a choice. Although largely unknown due to the popularity of 30-year mortgages that feature loan amortization, interest only loans can actually add to one’s wealth.

Traditional thought tells home buyers that less interest is paid on a 30-year mortgage. Recent discussions, however, have actually asked whether or not this is beneficial. In this report, three reasons will be provided as to why borrowers should consider an interest only mortgage loan.
Mortgage Interest Poses Tax Savings
30-year mortgages boast a tax savings to borrowers. However, this actually works against the home buyer.

Mortgage interest is tax deductible.

This means that individuals who pay mortgage interest every year receive a tax savings. For example, borrowers who reside within the tax category of 25% and pay $10,000 worth of interest save 25%, or $2,500, on that $10,000. The borrower, therefore, only pays $7,500 after tax savings are applied at the end of the year.

Conventional loans actually pose a loss for borrowers in tax savings. With loan amortization, the amount of interest paid on the mortgage decreases with time, and the payment applied to the principal segment of the loan increases. Therefore, tax savings also decrease for a borrower paying on a 30-year amortized note.

Cash Flow Increases

Loans that are interest only provide lower payments to borrowers than the payments posed by 30-year amortized mortgages. For example, a typical 30-year note might carry a monthly payment of $1,200. However, an interest only mortgage loan would pose a payment of only $1,000 on the very same loan. That is a savings of $200 per month, resulting in greater cash flow for the borrower.
If a person’s mortgage payment was $200 less than its original monthly figure, the additional savings would stimulate his or her cash flow. This is particularly important in a struggling economy. Many individuals look to cut spending every month, but few consider the possibilities of an interest only mortgage loan. The provision of such a loan that means a smaller monthly payment to borrowers who get to keep their homes might serve to improve the economy as a whole.

Greater Opportunity to Invest Money

Furthermore, the additional $200 savings provided to individuals each month could also be invested where the money is able to earn interest, remain liquid, and stay safe. Minimally, the money could be placed into a money market. Such money could be used for emergencies and other unexpected costs. The point is that this money is not tied any longer to the person’s home. It is now able to work for the borrower in a way that it could not previously do so.

Many borrowers are unable to let go of the old thought that they actually save interest on a 30-year amortized mortgage. However, the potential for such savings should not be the only factor in selecting a home loan. Interest only notes actually provide more cash flow to a borrower, which in turn leads to the prospect to build more interest with an investment account. This ultimately provides the occasion for borrowers to build their wealth.

The money saved each month could also be placed into a dividend that pays whole life insurance. Such an act replaces the equity in one’s home. Technically, the borrower is continuing to pay on his or her home. The money, however, is growing in another vehicle rather than remaining locked into the mortgage.
Such information should serve to shed a new light on interest only mortgage loans. Although these products are considered the black sheep of loan programs, they actually achieve three important elements: increase tax savings, stimulate cash flow each month, and provide the opportunity to invest for greater wealth. Such a loan may prove the right choice for some borrowers. Now, at least, more education has been provided on the subject.

Refinancing options.