TITLE

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

AUTHOR(S)
Aghili, Shaun
PUB. DATE
October 2004
SOURCE
Journal of Financial Planning;Oct2004, Vol. 17 Issue 10, p64
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
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.
ACCESSION #
14706928

 

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