Advantages and Caveats of Interest--Only Adjustable Mortgages for Clients

Aghili, Shaun
October 2004
Journal of Financial Planning;Oct2004, Vol. 17 Issue 10, p64
Academic Journal
While interest-only mortgages have been heavily promoted by many mortgage companies, especially as rising interest rates make standard monthly home mortgage payments more difficult to meet, many financial planners have remained skeptical of them. To understand how an interest-only mortgage works, planners need to first understand the components of the product's underlying adjustable-rate mortgage: which index the ARM uses, how rates are adjusted, yearly and lifetime caps, the ARM's margin, the potential for negative amortization. One reason that interest-only mortgages often make sense is that homeowners commonly move before they begin to seriously pay off the principal in the mortgage, and that most of the value appreciation they earn is from positive market forces, not principal paydown. An interest-only ARM with a good index and a tight margin allows borrowers to redirect the monthly mortgage savings toward other financial goals such as college savings or retirement. On the other hand, this is not a good mortgage for free spenders. This type of mortgage also makes the most of the client's mortgage-interest tax deduction. A table shows that the interest-only payment option results in higher total income-tax savings during the first ten years. This product is less appropriate for clients with smaller mortgage balances or who want to own their property free and clear and have only a limited time to achieve the goal.


Related Articles

  • Abbey offers two-year 3.65% fix for advisers only. York, Nicola // Money Marketing;10/29/2009, p10 

    The article reports on the decision of Abbey National PLC to offer mortgage loans with a two-year fixed-rate of 3.65 per cent to its financial advisers in Great Britain. It reveals that a total of 70 per cent loan to value with a booking fee of 995 pounds will be made available to its customers...

  • To fix or not to fix?  // Finance Week;7/27/2005, p64 

    The author reflects on whether or not it is time to peg mortgage rate of consumers for a fixed period in South Africa. Banks in the country are beginning to punt their fixed rate products to protect homeowners from a sudden increase in interest rates. SA Home Loans has launched a product where...

  • Your number's up. Bierck, Richard // Executive Report;Jul95, Vol. 13 Issue 11, p37 

    Reports on the impact of rising interest rates on mortgage banks in Pennsylvania. History of mortgage industry; Elevation of interest rates by US Federal Reserve; Efforts to overcome `perception' of high rates; Qualification of as many borrowers as possible.

  • Looking Back as Climbing Mortgage Rates Pause During Sept. 11 Week. Sinnock, Bonnie // National Mortgage News;9/15/2003, Vol. 27 Issue 50, p5 

    Discusses the status of the mortgage market in the U.S. as of September 2003. Impetus to decline in interest rates; Possibility of upward trend in rate to return; Political risk facing government-sponsored enterprises.

  • Insiders Selling Mortgage Stock. Muolo, Paul // National Mortgage News;03/05/2001, Vol. 25 Issue 23, p1 

    Reports that some insiders in the mortgage banking industry are cashing in on their stock holdings as interest rates fall in the United States. Impact of the decline in interest rates on mortgage banking firms in the U.S.; Officers and directors in the mortgage banking industry who have sold...

  • Including a Decreased Loan Life in the Mortgage Decision. Lesseig, Vance P.; Fulmer Jr., John G. // Journal of Financial Planning;Dec2003, Vol. 16 Issue 12, p66 

    The article discusses the appropriate maturity of the mortgage and the number of points to pay to reduce the mortgage interest rate. The mortgage-maturity decision must be part of an overall financial plan that considers long-term investing options, insurance needs, age, tax planning, risk and...

  • DA firms not in FSA crosshairs, says Malone. Malone, John // Mortgage Strategy (Online Edition);4/19/2012, p1 

    The author discusses procuration fees, a new element of regulation that affects small directly authorised (DA) firms and large mortgage companies in England. He opines that the intent of the Financial Supervisory Authority (FSA) is not to eliminate small DA firms but to create a healthy and...

  • Job Reductions Are No Shock. Greenberg, Stephen // Origination News;Dec2013, Vol. 23 Issue 2, p1 

    The article offers information on the increasing number of layoffs in the mortgage industry because of increase in interest rates and mentions the traits of a successful sales manager who can adjust in the changing business environment.

  • Flow Servicing: $6 Billion on Tap But Market May Be Running Dry. Muolo, Paul // National Mortgage News;2/4/2002, Vol. 26 Issue 19, p2 

    Focuses on the financial performance of mortgage banking in the United States. Reference to the pending servicing transactions of Interactive Mortgage Investors; Impact of industry consolidation on servicing side of the business; Decline of interest rates.


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics