How is it Possible to Make Money on Your Mortgage?
By Gina Jackson, Senior Vice President
Cornerstone Mortgage Company
If an affluent individual purchases a $1 million home and can easily plunk down the cash rather than take out a loan, that is exactly what he should do, right? After all, he would be spared paying all of that interest.
Wrong. Enter the relatively new interest-only loan, particularly popular within the last six months.
Here is how it works: Let's assume that our borrower is able to pay a large portion down, maybe as much as 50%. He still owes $500,000, which he borrows, paying only interest and absolutely no principal for at least the first five years, or seven or ten. That simple.
The benefits:
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Paying only interest reduces the monthly payment on the loan. On a $500,000 mortgage, monthly savings today on an interest-only loan are approximately $350 a month, which translates to $4,200 per year in savings.
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The $4,200 in savings that he would have paid toward the principal can now be placed in his investment of choice to make a better return on his money. Let's say the return on his investment is 12%, and the interest rate on his loan is 8%. He is still making a 4% return on his money - certainly a better use of funds than laying down cash for the house or paying off the principal on a 30-year fixed mortgage.
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Interest-only loans are particularly popular today because of the recent increase in interest rates. With interest rates higher this year by about 1% over the same time last year, an interest-only loan helps nullify the increase that would typically incur in a monthly payment while simultaneously increasing the borrower's tax deduction.
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Some affluent borrowers may not happen to need the tax deduction on the interest rate, but they are expecting a large windfall in the future (such as exercising stock options), at which time they expect to pay off the house. The lower monthly payment provided by the interest-only loan until then could be advantageous to this person.
Not long ago, an interest-only loan would have been available through banks only and not through mortgage companies. Today, most mortgage companies recognize the need for this kind of product for the savvy borrower.
Not everyone is a candidate for the interest-only loan. Some people simply want to pay off their principal right away and not have the debt hanging. Others need to start paying the principal immediately to gain equity, as everyone cannot put down a large portion for a down payment.
In any event, whatever your needs, a good mortgage company will provide you with loan options that are tailor-made for you. And you may wind up richer than you started.
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