In today's Massachusetts real estate market there is a lot of confusing to which Mortgage is right for a client. There is a lot of fear being put out in the marketplace against certain types of loans. One of these happens to be an interest only type loan, this is loan that there is no principle being paid down. This a very good loan for the right client.
Why a bad Rap?
First we must take a look at why this product Is getting such a bad rap. The most common reason was that it was used by a borrower to buy a house that they normally could not afford. The next reason is that it was used with a client that shown a history of not being disciplined. These are the so called subprime borrower. They used this product has quick fix to pay off high interest credit card debt and then proceeded to rack that debt back up again. Then with the current market crisis they did not have enough equity to refinance out of there subprime loan. These clients should have been put into fixed rate product.
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When should an Interest only loan be used?
This product should be used with the borrower understand how to save money. This is a perfect tool for those clients who want maximize savings and tax benefit that comes with owning a house. Let's take a look at standard $300,000 loan.
30 Year Fixed - 5/1 Interest only
6.25% Interest Rate - 5.75 Interest Rate
$1,847 Monthly Payment - $1,495 Monthly Payment
$391 Monthly tax Benefit - $374 Monthly tax Benefit
$1456 Monthly Cost - $1,121 Monthly Cost
$19,988 Principle Paid over 5 years - $23,825 in savings over 5 years(6%ROR)
This example illustrates that over a 5 year period you would have extra $3,837 in savings not to mention the fact that you would be liquid. The $23,825 would allow the homeowner to make almost 16 full payments if they were to lose there job. With the new laws that have been put into place in Massachusetts it is virtual impossible to touch equity if you are unemployed. Therefore forcing more clients into Foreclosure or having to sell their house.
Where should you put the money?
It is my belief the money should be invested in a tax free growth vehicle. I personally like Variable Universal life Policy's. They grow tax free and the money can be taken out tax free. They should be based on the S&P 500. Over any 10 year period the index has returned a return of 10.5%.
If this is considered to risky there are other many good programs. Such tax free bonds, IRAs and Roth's. What I would definitely advise against is the buying of individual stock.
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