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The old way…
Traditionally, homeowners use regular monthly payments of principal and interest to pay off their mortgage balance. Every month that you send in your payment, the lender keeps the interest portion and then applies the remainder of the payment to principal reduction. Eventually the loan “amortizes” or pays off.

I said traditionally because until recently, this was the only option offered by lenders. Now, however, a very interesting loan option has become available. It is called an Interest Only loan. This product allows the homeowner to pay only the interest portion of the monthly payment.

Lower monthly payments…
The interest only portion of your typical mortgage payment is significantly lower than the full or amortizing payment. By paying interest only, we can considerably reduce our monthly mortgage payment. The remaining portion normally earmarked for principal reduction can now be put to work for the homeowner to use in a variety of different ways.

Invest it wisely…
As an investment strategy, “paying” the principal portion to your investment account or to your financial planner (instead of sending it to the lender), can over time be more financially advantageous. It allows you to invest the principal portion more aggressively in a wider group of investment vehicles, i.e. your 401k, SEP, IRA, stock, bond, mutual fund, education account etc. These proceeds are now in a vehicle which if invested properly can grow more rapidly and be more accessible to the homeowner than the traditional equity buildup in a mortgage. The goal is for you to achieve an investment rate of return greater than the interest rate charged by the lender. Consult your financial planner to tailor an investment plan that is right for you.

Use the savings wisely…
Homeowners looking for ways to fund those construction and home improvement projects may want to take advantage of the monthly cash flow savings of an interest only loan by putting it towards increasing the value of their home.

Pay the mortgage off wisely…
After years of investing your money wisely, it’s now time to pay your mortgage off. You have the investment funds which you have accrued to pay off the mortgage and still have money left in the account for retirement.

What else does this interest only loan offer…
This loan offers you the flexibility to pay your mortgage down at your own pace. Each month, you can decide whether to make the interest only payment or pay interest plus principle. It is entirely up to you. In essence, you can create your own amortization schedule.

Who can benefit from the interest only loan…
This type of loan works for a wide variety of people. It is a benefit to the self-employed, who receive income irregularly throughout the year. They can choose how much and when to pay down their loan. This same choice is a benefit to those who receive all or a portion of their compensation quarterly or annually through commissions or bonus income. For the salaried borrower, having discretionary funds on a monthly basis is always of value. It allows you to maximize your cash flow on a monthly basis.

Talk to a mortgage professional…
You can get an interest only adjustable rate mortgage in a variety of ways. Call to discuss which mortgage is right for you.

By: Karen Mulreed & Paul Lebowitz