Could You Save Money With An Interest-Only Loan?

Added May 12, 2004 by WGN-TV Show Notes

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Summary: You could cut your mortgage payment by a third or even in half by switching to an interest-only loan. But how do you know if interest-only is the right loan for you?

What if you could cut your mortgage payment by a third or a half? You could if you used an interest-only loan.

But is that the smartest move you can make? Everyone wants to save money, but there are only so many places you can cut your budget. And at the same time, everyone wants to buy a big house. Are interest-only mortgages the answer? With an interest-only loan you might be able to have your cake and eat it in your big kitchen too.

Unless you've got hundreds of thousands of bucks hidden in your mattress, you'll need a mortgage when you purchase your home. Each payment is part principal and part interest. But what would happen if your entire payment was principal? You could buy a much bigger house or....

"With most interest-only mortgages, you can cut your payment in half and that's sizable," says David Herpers, Amerisave Mortgage.

But an interest-only mortgage doesn't stay that way forever. With most interest-only mortgages, you start paying down principal at year 10.

"If you haven't sold the property at year 10, you're going to amortize the loan over 20 years. So your payment will be substantially higher starting at year 10," Herpers says.

How high? As much as 30 percent higher. And what happens if interest rates rise? Rates are at 40-year lows now, but if the interest rate on your loan rises from 5 percent to 8 percent, your monthly payment will shoot up another 40 percent. If your property doesn't appreciate in value, you could lose a substantial amount of money if you have to sell quickly for some reason.

That's the bad news. But if you're good with managing your money and believe your property will appreciate, you could do a lot with the money you'd save on an interest-only loan.

You could use the savings to prepay your mortgage, fix up your house, set aside money for your children's college tuition, as well as your own retirement. If you're on a seasonal income, or if you work on commission, you might find the lower monthly payments helpful when budgeting.

Just remember an interest-only loan isn't for everyone.

"We as mortgage brokers and lenders have to be careful that we're not steering customers into these products that aren't ready," Herpers says.

RESOURCES

www.bankrate.com www.hsh.com

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