CREATING AFFORDABLE PAYMENTS (PART IV): INTEREST ONLY LOANS

In Part II of the Creating Affordable Payments series, we looked at 40 and 50 year loans to see if the advertising claims about lower were true, and we found that these loans do not really help, and the overall interest cost is much higher.

In Part III , we looked at Intermediate ARMs to see if they were the answer to today?s most common challenge. Unfortunately, with the inverted yield curve in U.S. Treasury securities, the rate on a 5/1, 7/1, or 10/1 ARM is often higher today than the 30 year fixed.

So today let?s have a look at interest-only loans to see what they can do.


First, let me start with an observation based on personal experience. Most consumers believe that interest-only loans are bad. I rarely encounter a client whose mind isn?t already closed to the notion when the topic first arises. The press has done an effective job of scaring the consumer by associating interest-only loans with the real estate bubble and predatory lending. But interest-only loans?particularly the 30 year fixed variety?are wonderful financial planning tools, and they are safe. Read Four Great Reasons to Choose an Interest-Only Loan.

To keep to the point, interest-only loans are one of the most effective tools we have for safely creating affordable payments.

Here is a comparison of monthly payments for 30 year fixed and a 30 year fixed, interest-only loan:

30 year fixed, $300,000 @ 6.00% = $1799
30 year fixed, $300,000 @ 6.25% = $1562 (interest-only)
That?s a savings of $236 per month, a significant amount for a buyer in that price range. And that is despite the fact that there is generally a slight premium in the rate for any loan?s interest-only counterpart.

For any good mortgage advisor, a loan program is just a tool we use to do a particular job. An interest-only loan is a wonderful way to create flexibility and to shape the mortgage payment to better fit the client?s life. The borrower can decide later whether to catch up on principal or increase their pre-tax 401(k) contributions, but for the present, interest-only loans are one of our best tools for creating more afffordable payments.

Got a question about interest-only loans? Email me.