|
Interest-only mortgages are pushed
aggressively nowadays by lenders and brokers, but they're not for
everyone.
An interest-only mortgage might
be a good fit for:
- someone whose income is mostly in the form of
infrequent commissions or bonuses;
- someone who expects to earn a lot more in a few
years;
- someone who truly will invest the savings on
the difference between an interest-only mortgage and an amortizing
mortgage, and who is confident that the investments will make
money.
Financial advisers don't recommend
interest-only mortgages to regular wage earners who take out moderate-size
home loans and don't have a strategy for investing the savings.
With an interest-only mortgage loan, you pay only
the interest on the mortgage in monthly payments for a fixed term.
After the end of that term, usually five to seven years, you either
refinance, pay the balance in a lump sum, or start paying off the
principal, in which case the payments jump skyward.
If there were such an animal as a typical interest-only
borrower, it would be an executive who earns a moderate salary and
whose main income is from bonuses once or twice a year, says Jim
McFadden, program manager for private mortgage banking for Wells
Fargo. An interest-only mortgage would provide the lowest possible
monthly payment for lean months, yet allow the executive to pay
down big chunks of principal when bonus time rolls around.
Business owners with unpredictable incomes might
benefit from interest-only mortgages, too, because "they need to
maximize their cash flows as much as possible, and this is a great
way of doing it," McFadden says. "And, of course, you have the option
of paying down principal whenever you want."
Historically, interest-only mortgages were for affluent
borrowers, he says, but "you've seen the product come down-market
a little bit in the last couple of years."
When you go too far down-market, interest-only loans
don't save enough money to be worthwhile. Let's say you borrowed
$200,000 at 7 percent. For the first three years, the savings from
an interest-only loan would amount to less than $200 each month.
Double the loan amount to $400,000 at 7 percent, and an interest-only
loan saves more than $325 in the first month.
Online lender E-Loan began offering interest-only
mortgages this year because they provide borrowers with a lot of
flexibility, E-Loan co-founder and CEO Chris Larsen says. They're
available in typical-size loans -- even for under $200,000. The
power of an interest-only loan kicks in, Larsen says, because "you
can buy much more house."
The inference is that an interest-only mortgage
allows one to buy more house than one can afford. That's not what
Larsen means. He says these loans appeal to people on the career
fast track, "younger borrowers who have a future of increased earnings
ahead of them ... and really want to maximize their buying power
now."
|
