INTEREST-ONLY MORTGAGES: GOOD POLICY?

Interest-only mortgages have been around since the mid-1990’s, gaining momentum and popularity in the past five years. Originally, they were intended for affluent buyers who would rather keep their money invested in the market, which was outperforming the opportunity cost of making principal payments on their mortgage.

For conversation’s sake, let’s assume you are looking at a 30-year fixed rate loan with an interest-only option.

In this case, you have the option to pay only the interest that is due on your mortgage loan, but no principal down on the mortgage. This option can be found on just about any type of mortgage, whether it is a fixed rate or adjustable rate (ARM).

Typically, the interest-only option ceases after the first five years of the loan term elapses. At that time, the loan payment is recast over the balance of the loan, and you pay the loan down over the balance of the remaining 25 years. This clause is built in so that you do not need to refinance to the loan, and you have the safety of a guaranteed rate over all 30 years. After five years is up, your payment goes up slightly, and remains at that new rate for the balance of the term or until you pay off the loan in full.

Often times, using an interest-only mortgage option is the only way for a first-time home buyer to qualify for a loan. While this can shave hundreds of dollars off the monthly payment, there is the potential for disaster down the road, if not managed correctly. To clarify, here is an explanation of some pros and cons for interest-only mortgages.

An interest-only mortgage can be appropriate for:

•Someone whose income is mostly in the form of infrequent
  commissions or bonuses, or if their income fluctuates regularly.
•Someone who expects their income to rise in the next few years.
•A savvy investor who will invest the savings on the difference
  between an interest-only mortgage and an amortizing mortgage.
•Someone who may not be in the property and will sell or
  refinance within a few years.
•A first-time home buyer looking to minimize payments for a few
  years.

Possible concerns with interest-only loans:

•No principal is paid down, and the client continues to refinance
  or purchase again with an interest-only mortgage, thereby never
  starting the amortization process of paying down principal.
•Property valuations fluctuate, and the owner's equity depletes
  since no principal has been paid down.
•Combined with zero-down payment, these loans can leave the
  buyer with no equity and no way of paying closing costs when
  selling, if sold before enough market appreciation happens, or, if
  a slow market, property prices slightly depreciate.

If you’re wondering what type of mortgage is best suited for your needs, it is imperative you work with a team of professionals who look out for your interests first. Your Infinity loan officer is here to serve you, and is well trained to assess your financial situation, tax liabilities, your goals and needs, and suggest the appropriate products and professionals to consult with along the way. Your Infinity team is here to keep you confident and to ensure you get the right financing, every time.