I’ve seen several threads on the relative merits and demerits of interest only mortgages. I do, however, have a question that I did not see answered (and would appreciate my fellow doper’s help):
I am considering taking out a 5 year ARM with an interest only option. My plan is to make the interest payments and then make an additional mothly payment of 50% of the required payment.
My rationale is that I can pay down the loan faster this way and I can take advantage of the interest relief on my taxes.
To expand on gazpacho’s point, if you can afford to pay 150% of the interest-only payment, why not look at a 15 year fixed mortagage? They seem to be running about 5.5 % right now, which is extremely low. That takes all the rate risk out of the calculation, which seems very relevant when federal deficits are high and interest rates are likely to go up in the short to medium term.
An interest only fixed rate, a regular fixed rate, a regular 5 year ARM? We would need to know how these alternatives compare, relative to the payment, interest rate and whether you could pay extra on the principal.
One feature on your idea is that your payments will go down each month, as the required interest only payment will decrease as your balance does.
If you know you will be paying off the loan within a few years and the payment is OK with you, can prepay if you want, go with the least rate of interest, whatever the type. In any case, less interest means less as a tax writeoff.