Financial Planning and Interest Only Mortgages. Helpful Info to Remember July 15, 2009
Posted by janey in : mortgage finance , trackbackI have observed lots of changes in my life over the course of living it, and I can tell you that as you grow older, Caution will become your friend; when you’re young, you plainly throw him to the wind. As you get older, you wait for him to blow by, and then you reel him back in, why? Caution has only a few friends, but several adversaries: Haste and Waste; after several trips around the block with these two, Caution begins to look like a much better friend.
Part of the requirement for being a friend to Cautious, is that you take the time to observe all your options, and make a good sound decision. This is when I was introduced to Financial Planning, 401(k) s, Retirement Funds, etc.
I’ve told this from a story viewpoint, but it is in all honesty, the truth. As you get older you do become more cautious in your investments, with your time and your funds. Interest only mortgages are one of those options, that if you’re investing in real estate for the short term, and you’ve consulted with a reputable financial advisor, you might want to consider. Investment portfolios do not in general include real estate, so more than likely this is a business endeavor or an investment business. In either situation, financial planning is a must. This is one of those options, that should however, be considered only after careful planning and thought. The trade off, may be or may not be to your benefit.
Long-term investments, those with capital gains, and purposes other than a fast profit, I don’t accept as true are candidates for the interest only mortgage. The interest only mortgage doesn’t offer a lot in the way of building and growing investment value, as you plainly never enlarge the value of the asset to you. You enlarge the value of the loan for the lending institution, as you are continually providing a profitable situation for the lender. Your principal investment responsibility never decreases.
What about the short-term implications and your financial planning? Well, this leaves a lot of doors unopened and lots of avenues unfamiliar. However, given the fact that you’re considering the impact of the interest only mortgage product on your financial planning expectations, there aren’t very a lot of “short-term” considerations open for conversation. The only short-term benefit to interest only is that your monthly payment is often very low during the term of the interest only payment.
When you take into account the impact your 401(k), an MSA, an IRA, or any other tax deferred savings or retirement program can have on your outcome, the interest only mortgage doesn’t in actual fact have that much to offer in the realm of tax savings, or tax deferment; yes, it’s true that your mortgage interest is tax deductible, but not on a one-to-one ratio. Tax deferred retirement accounts, even SEPs, for the self-employed person have a one-to-one ratio of tax savings.
One more long-term financial planning consideration: when you would normally have paid out a regularly amortized loan, you will still be paying on the interest only mortgage. What could the probable savings be, for you, if you weren’t still paying on a mortgage? The time value of cash is a concept that few consumers ever learn to appreciate. It means the dollar you have now, will be worth less tomorrow than it is today, consequently saving today yields a much better benefit than waiting until you’re 35 or 40 to begin saving and planning for retirement.
Quite often, your home is your greatest advantage, and is the only savings that lots of consumers have managed to accumulate. If the only payments you have made were for the interest due on the principal, you successfully have no accumulated savings. Now, that might not be an matter for someone in their 20s or early 30s; however, by the time you reach your 40s, you have begun to consider retirement, and ways to save for that stage of your life.
As I stated earlier, caution and good sound financial planning may determine that an interest only mortgage will benefit you very much. But, I would only take into account this option only after I had taken time for careful consideration and good financial planning.
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