This “interest only mortgage” topic is one in a series titled:

The Top Ten Reasons Why You Just May Be A Stupid Home Owner.

Now, let me preface what I’m about to say here with this;

You are not going to like what I have to tell you. In fact – I’ve actually witnessed clients freak out when I suggest this, for me only to realize they have a severe case of Stupid Home Owner Syndrome. However don’t worry because there IS a cure and it exists right here at StupidHomeOwner.com (donations for my extremely knowledgeable insight are always accepted and appreciated).

The Inside Story On Interest Only Mortgages

Some say “it’s all in who you know” – but I say that’s a bad place to start when it comes to mortgage financing.

What I mean is this. Most of us (i.e. you) learned about mortgage financing and home ownership from our parents, or friends or whoever may have done it before us.

In most cases, our parents learned about mortgages from their grandparents and so forth.

In essence, a lot of mortgage knowledge has been passed on from generation to generation when in fact some old theories just don’t apply anymore.

For example, our grandparents or great grand parents used to have “mortgage note burning parties” – with the idea being the house has been paid off and they no longer owe the bank anything, thus removing them from their monthly mortgage obligation

Back then, homes were 10,000 or maybe $20,000 total. Heck, I’m only 40 and my parents built a brand new house in the 70’s for about $18,000. I’m talking a full garage, 5 acres, 3 levels, fully finished, a deck and a pool.

The point is, especially where I live in Northern Virginia homes sell for a reasonable $700,000 with no garage, no yard, no pool and no basement. A home in the six figure range is a totally different financial tool than a home 40 years ago or more. AND I don’t want to hear any crap about inflation, or how gas was cheaper back then or any of that, that’s not my point so stick with me here because what I’m saying applies then AND now, however it’s all about perception.

Ok, So Let’s Get To The Meat Of This Interest Only Thing Already!

Alright, alright – I’m getting there…

Why All The Interest Only Fear?

Here’s where the fear of interest only comes from (or IO as they say in the mortgage business).

If you take an interest only loan on your mortgage, the premise is that you’ll never pay off your mortgage right?

WRONG!!!!!! (feel free to add more exclamation marks for effect)

Holy bat mobile robin, didn’t everyone tell us we want to pay off our mortgage so we can have one of those mortgage note burning parties?

Listen here bat boy – you are wrong!

I’m not going to pick apart every detail here, however here are some of the bad things that happen when you rush and pay off your mortgage as quickly as possible.

1. you lose your monthly/yearly mortgage interest tax deduction

2. losing the tax deduction puts you in a higher income bracket

3. showing more income, means more taxes

4. you give the bank free money, essentially loaning them all your extra money (aren’t you nice) so they can go earn a return on it and not you.

In fact, while you’re giving money away for free, give me some (no really).

Here’s another thing that happens when you pay off your mortgage early.

Your home equity does nothing for you. If the market drops, your equity vanishes – gone.

Your home is worth $X in equity, but you can’t use it at all unless you qualify for it or pay for it (i.e. a refinance, home equity, etc.), and worst of all it certainly isn’t earning you any real money. Oh, it might make you “feel” good to see on paper. How many IOU’s have you collected over the years. How valuable are those IOU’s now?
Your home equity is like an IOU. Come to grips with this fact and move on to an idea that works better.

That better idea is an interest only mortgage – and here’s why.

Possible lower payments yes, but that’s not the point.

The point is (and I’m being basic here), instead of paying principal AND interest on your mortgage, you are only paying interest.

Normally the principal amount you pay to the bank each month is a loan you are making to the bank of your own money – and you are doing it without making the bank do anything to get it (except the time it took them to trick you into a fully amortized loan).

Of course you may be thinking – “what does saving $200 per month on my mortgage payment get me?”

Well, it can literally make you a millionaire.

The Millionaire Home Owner

Did you know that if I saved $2000 a year from age 18 to 28 and put it in a good mutual fund, and then stopped saving all together I will have saved more than you if you started saving $2000 per year at age 28 (10 years later than me) and did so for the next 30 years (which is 20 years longer than me).

The simple fact that my “less” total money was earning a return for a total of 40 years and yours was only in for a total of 30, even though you saved more of your cash then me – the 40 total years beats you every time (all things considered).

You can’t compete with compound interest. When we both get to age 58 (or 10 years of early in life savings for me, and 30 years of savings later in life for you) I’ll have millions and you won’t. I saved less and had time on my side, you saved more but over less total time than me.

If you get an interest only mortgage and put your $200 per month savings to work over the lifetime of your home(s) then you will end up at retirement very very wealthy.

AND, AND, AND…

When your home earns equity over the years (say every 5-10) and you refinance to pull out that cash (to the maximum level you can afford) – and in turn invest that equity properly (a whole other topic) then when you get to retirement you can literally write a check and pay cash for your home and live off the rest.

OR you can pay the home off early with a fully amortized loan like you probably have now (i.e. principal AND interest) and then you can bag groceries at the local food market in your retirement cause you didn’t save anything. I don’t have anything against grocery baggers however I have bigger plans for my retirement.

And don’t think that 401K will save you – cause even though you are saving on taxes now, you’ll pay them yearly when you pull money out at retirement – essentially lowering your total useable income.

Do you think income tax rates will be more or less when you retire?

I can almost guaran-god-damn-tee you they will be higher and you’ll be paying even more in taxes THEN than you think you saved now by even contributing to your 401K.

Now, I know I scared off about 99% of the readers after making the above statement, so the rest of you need to make your comments below and get involved in this conversation – before I feel like I’m the only one who gets it here.

It’s lonely at the top. Come join me

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