"Haste makes waste," as the old saying goes, and "caution is your only friend." How true this saying is when it comes to making plans for your own money. Caution means that you stop and think about all of your options before making a choice, so that most of the time, you make a good choice that leads to a good result. When it comes to financial planning, 401(k)s, and future money needs like retirement funds, etc., this step is almost a must. If you make bad financial decisions, you could be late on payments, have your credit score go down, or even go bankrupt.
An interest-only mortgage is something you might think about if you want to invest in real estate for a short time. Before getting one of these mortgages, you might want to talk to your financial advisor because they can be hard to manage. And because you can't really think of it as part of your investment portfolio, it will probably be part of a business venture or investment. Here is where it really helps to look at all your options. If you want to buy a piece of property as a long-term investment or if you plan to claim capital gains on the property, an interest-only mortgage is not a good way to pay for it. Interest-only mortgages are used to make a quick profit. You get in, and you get out. Don't just hang out in the middle. In, out, quickly, and easily. What am I trying to say? Because interest-only mortgages don't let the value of your home go up, there is no way for your equity to grow. This means you can't really get more out of the deal, and your investment debt never goes down.
Short-term effects and things to think about with interest-only mortgages come down to one main point. During the term of the loan, the payments are pretty low, but that's because the total amount owed never goes down. Aside from that, you probably shouldn't think about this mortgage product very often when you're planning your finances.
When compared to bigger products like IRAs, MSAs, and even 401(k)s, the interest-only mortgage doesn't offer much in the way of tax-deferred savings. The interest can be deducted from your taxes, but not at a one-to-one rate. Even for a self-employed person with a SEP, the tax savings can be equal to the amount put in.
If you look at an interest-only mortgage and a regularly amortised mortgage in the context of long-term financial planning, you can see that when the regularly amortised loan is paid off, the interest-only loan still has a long line of payments to be made. Taking into account the time value of money, the amount saved could be quite large. Once you know what time value is, it's easy to understand. The main idea is that a dollar today is worth more than a dollar tomorrow (history seems to confirm this). So money saved today will be worth more in the long run than money saved in ten or fifteen years. This is why financial planners tell people to start saving for the future when they are young, instead of waiting until they are 35 or 40.
Even though an interest-only mortgage might seem like a good idea, you should be careful and think about all the other options. There's a good chance that a trustworthy financial planner will know of other options that will be better for you in the long run.
