From what I understand about mortgages, which isn’t a lot at all, I just don’t see any scenario where an interest only mortgage is a good idea.
You pay it off for let’s say 20 years and you still have the full balance remaining. What am I missing?
In: Economics
It used to be very beneficial in The Netherlands, where the paid interest on your mortgage could be deducted from your income. A high mortgage the entire 30 years meant the most tax deduction. It was normally combined with a savings account, which would, in those same 30 years, save up the same amount of the mortgage.
Sadly, this construction is now not allowed any more.
If your scenario would still exist, it would definitely be valuable, even today. A mortgage of 200.000 now is NOT the same amount as 200.000 in 30 years, simply due to inflation. If inlfation is a not-impossible 3% for 30 years, that 200.000 would have to be more than 470.000 to have the same value. So, your mortgage effectively has shrunk by more than 50% in actual value!
You are missing one important thing: inflation.
Every dollar you pay on the mortgage principle today will be worth less tomorrow. You can pay off a 300.000 dollar mortgage over 30 years, but by the end of it that 300.000 dollars might be the price of a midsize family van instead of a house.
Obviously, not paying down the principle has a cost too since the interest stays high, but it could be worth calculating which approach is best financially.
You can always contribute more than the interest payment to pay down your principal each month. Any extra dollar you pay goes to the principal. I think that’s fairly normal. But if things ever get tight or if you lose your job or something, you’ll only have to worry about paying the interest until you restabilize.
Often people in jobs like sales will take an interest only loan because their income can vary so much month to month. When they have a great month they’ll put a lot down toward the principal.
When we did it in 06 just before the crash the loan person at wamu sold us on it like this “interest only for 1 year, then you refi next year when you have equity and you will get a far better rate.” And we bought into it. 312k interest only, then later that year the market crashed. We go back the following year to refinance and the house was only worth 285k based on comparables. So we got fucked on the timing on that. Had we did it a year earlier it 2kukd have been fine bit that market crash really fucked people in the end.
I had a friend who exclusively did this. They bet the house would raise in value, wanted a low payment, wanted to live in a nicer house than they could otherwise afford and claimed that he liked changing homes every 3-5 years. Which for the life of me I cannot imagine being true, because I absolutely hate packing, moving and unpacking. Not to mention all the random crap that needs to be fixed when you buy a home.
There is nothing preventing you from paying it off on the normal amortization schedule. So if you have variable/unpredictable income, you can get an interest only mortgage and treat the interest payments as your floor of how much you need to pay. In lean months or years you may be able to pay that much but not a regular mortgage’s monthly payment, in better months or years you can pay down the principal.
If you have a separate brilliant scheme to pay off your house price and then some at the end of the payment term, but you need the money right now, then it makes sense. Such as, you are starting a business that you can sell in 20 years to make a ton of money, but the business doesn’t make you enough today to pay a full mortgage. Or you invest in the next bitcoin.
you get a lower payment, so easier to qualify for the loan
you are not paying down the loan, but you might expect the property to appreciate and sell in a short time
Basically you don’t want to miss out
It makes my rental properties cash flow better. Who cares about the principal?
Americans move every 7 years. We buy a huge home; take the tax deduction and the equity without the “ownership” hang ups
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