Interest Only Mortgage – 3 Big Reasons Why You Want One
Most people would never entertain getting an interest only mortgage, but we would. An interest only loan is not the popular choice among mortgages, but most do not understand that it can be utilized to increase your wealth. So, why is it that a 30 year note with loan amortization is typically everyone’s choice?
Less Interest
Conventional wisdom tells you to get a 30 year amortized loan for one reason: Less interest. It is true, you pay less interest. This is what makes this mortgage product so great.
Or does it?
3 Big Reasons to Reconsider an Interest Only Mortgage
* Mortgage Interest is Tax Deductible
* The sexiest feature of a 30 year amortized loan, the tax savings, is actually its biggest drawback. Look, I don’t like paying interest as much as the next guy. However, mortgage interest is your friend here because mortgage interest is tax deductible. Meaning, if you pay $10,000 in mortgage interest a year and you are in the 25% tax bracket, Uncle Sam picks up 25% ($2500) of the bill. You actually only pay $7500. With a conventional loan, your tax savings diminish because of loan amortization as you near the term of the loan. The interest portion of your payment decreases and the principal portion increases. Thus, your tax savings decrease as the years go by with a 30 year amortized loan. Greater Cash Flow
* Interest only loan payments are less per month than a 30 year amortized note. Let’s say that with a 30 year note, your payment is $1200 a month. With an interest only mortgage, your payment is $1000. That’s a monthly cash flow difference of $200. In this economy, cash is king! Imagine if your mortgage payment was lower by $200. Would that help you in this economy…or any economy? The fact is, people would love the influx of cash flow in times of struggle no matter how much they end up paying for their home. If it means I can make the payment and keep my home, you bet I’m on board. More Opportunity to Earn Interest
The old you would spend that $200. The new you will take that money and put it in a vehicle that’s safe, liquid, and earning a rate of return. At the bare minimum, you can at least put this in a savings account and build your emergency cash fund. Your money isn’t locked up in your home. Keep it accessible, safe, and earning interest for you (not the bank).
I Know What You Are Thinking
But what about all that interest I save with a 30 year conventional note?
Interest savings is not the only consideration when choosing a mortgage.
Remember, an interest only loan means an increase in cash flow. And an increase in cash flow means opportunity to earn interest.
At this point, you have the opportunity to put that extra cash flow in a safe, liquid, interest earning vehicle. Instead of incurring an opportunity cost, you gain the opportunity to increase your wealth.
You can put the extra money away in dividend paying whole life insurance. This displaces the equity from your home. In a sense, you are still paying off your home; the money is just growing in another bucket rather being trapped in your home.
I hope this gives you a new perspective of interest only mortgages. I know it is considered the “red-headed step child” of mortgage products.
But, it accomplishes 3 big things: It keeps your tax savings continuous, increases your monthly cash flow, and it gives you an opportunity to earn interest on that cash flow.
Consider it for your home. At least now you can back up this decision with sound arguments. Who knows, you may like being the odd one in the room.
Read more on interest only mortgages and get help with debt.
Isn’t it time you choose financial freedom?
