The Truth About Mortgage.com

These days very few people seem to be interested in paying off their mortgage. Many potential homeowners and current homeowners alike just want to get the cheapest financing available, with the lowest payment options.

And with so many exotic mortgage programs available, such as negative-amortization loans and programs with introductory teaser rates, it’s easy to understand why.

But what many homeowners may not understand is that offsetting or reducing monthly mortgage payments increases the overall interest one pays over the life of the loan, and reduces the amount of principal one will gain in the near term.

Let’s look at the interest-only option to highlight this point:

Loan amount: $500,000
Interest rate: 6.25%
Principal & Interest payment: $3,078.59
Interest-only payment: $2,604.17

As you can see, the interest-only payment is much more attractive than the principal and interest payment, nearly $500 less each month.

But if you make interest-only payments on your mortgage each month for the first 5 years, you will have paid substantially less than your fully-amortized payment, but gained nothing in the way of principal. You would have zero ownership in your home unless it appreciated during that time. And once the interest-only period came to an end, you monthly mortgage payments would jump, possibly to unmanageable levels for some.

Interest-only options are almost standard on mortgage loans these days. The option is available on almost any program, from a 30yr fixed mortgage with an interest-only option, to an adjustable-rate mortgage with an interest-only option. Even the pick-a-pay loans have an interest-only option available.

It usually does come at a cost, about .125 to .25 to the fee, or roughly .125 to the rate. So instead of an interest rate of 6.25%, you might secure a rate of 6.375% with the interest-only option. The interest-only period is usually the first 5-10 years of a 30 year loan, and after that the homeowner must pay the full principal and interest payment.

However, most homeowners usually just refinance once their options are reduced, and find a new, lower payment option. And then repeat the cycle. With home prices on the up and up, eventually you can gain considerable ownership in your home without ever paying any money to the principal, but those days seem to be behind us now. And why not pay more now and own your home free and clear?

All that said, many think interest-only loans are a complete waste of time, and that you should always pay at least some principal each month. But it also depends what you plan to do with your home, and if you really plan on owning the property outright at some point. If it’s just an investment property, or a short-term fixture, you could argue for paying interest-only to keep payments low while leveraging the money elsewhere.. But if you plan on staying in your home long-term, it is wise to pay principal and interest to gain ownership in your home.