It’s no accident that the rise in popularity of interest-only mortgages has coincided with the unprecented rise in property values nationwide. Most people see it as a way to be able to afford a home at the high prices they command these days. The larger the numbers, the more money you can save on a monthly basis with interest only payments. But is it worth it in the long haul?
Let’s say the houses in the area you want to buy in cost 500,000. Somehow you have 100,000 to put down, but you still need to borrow 400,000. Let’s say the lowest interest rate you can get is fixed at 5% for 5 years. Your fully amortizing payments would be $2,147.29 per month, while an interest-only payment would be $1,666.67. Looking at it that way, you could save $480.62 a month for 5 years, a total savings of $28,837.20.
Now let’s say that at the end of 5 years, your house is worth a million dollars. If you had been making fully amortizing payments, your equity stake would have grown from $100,000 to $632,685.07. If you had been making interest only payments, your equity stake would only be $600,000. If you can afford to, it’s better to make fully amortizing payments.
However, if you can only afford the $1,667 a month, and you want to buy a house, interest only starts to look very attractive. Especially if you want to live in an area where prices are appreciating quickly.
One more point: a very savvy investor (if there is such a thing) could take the 480 a month they’re saving and invest it in stocks and/or bonds, or a business they’re starting, or maybe the mortgage on an investment property. In any of those cases, they might be able to get a better return than if they simply plowed it into the equity on their primary residence.
And yes, there aree 100% LTV interest-only loans in the marketplace.