A Mortgage Calculator Will Tell The Truth About Interest Only Loans

There's a lot said on television and in newspapers about interest only loans being a horrible mortgage to acquire. In most cases they are, but they were created for a reason. Some people need an interest only loan to get the borrowing power needed to afford more than one loan.

It's targeted more to the real estate investors, or handy man trying to turn a quick profit by fixing up a home. Let's assume that an investor has an extra $2,000 per month that the bank thinks they can afford for a monthly payment. I'm going to exclude taxes, insurance and condo fees from this example because it will be easier to prove my point.

Investor - $2,000/mo available - He wants to buy and fix up two properties for $200,000 each because he will be able to flip them when finished for $250,000 each. Use a Mortgage Calculator that has an amortization schedule to see the monthly payment with principal and interest.

200,000 = 1075/month
200,000 = 1075/month

The bank said the investor could only afford $2,000 per month or it would be denied. He's at $2,150 so what does he do? Take another look at the Amortization Schedule and notice that if you got an interest only loan, which means you don't pay any principal, then it would lower the monthly payment by $240 each.

200,000 = 835/month
200,000 = 835/month

Now the investor has the borrowing power to afford both homes with an interest only loan. He doesn't care about paying down the principal because he only wants the $50,000 in profit from each home. If you're buying a home for the long term then paying down principal is very important, but if you're flipping a home then there's no point. The reason there's no point is because all the principal you put into the home you get back when you sell it, and the investor wants to sell it right away, so why put money into the home that he could use fixing it up?

I very much agree that an Interest Only Loan should not be used on a regular basis. It definitely shouldn't be used to "afford" a home that you want to live in for the next 10 years. You're better off renting at the point, because it will be cheaper and less of a hassle. If you pay the bank interest, and pay taxes, insurance and condo fees without paying principal then what’s the point of owning a home?

By: ChristopherG Bell

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