Is an Interest-Only Mortgage Your Ticket to Buying a Home in 2017?



Thinking of buying a home this year? With interest rates, rents and housing prices all on the rise, this could be an opportune time to make it happen – and an interest-only mortgage loan might be the thing that makes it possible.

How does it work?

While not for everyone, an interest-only mortgage offers a host of advantages for some borrowers. As the name suggests, these loans allow you to pay only the accrued interest on the loan each month for a period ranging from 5 to 10 years. Because you make lower monthly payments during this timeframe, you enjoy increased financial flexibility (meaning you can invest the difference or choose to pay principal in conjunction with a bonus or other cash influx).

After the interest-only period expires, the loan converts to a more standard structure where both principal and interest are paid on a monthly basis. At this point, you’ll see your mortgage payment go up – sometimes substantially. Because of this, interest-only loans are typically better for borrowers who expect to be able to cover those higher payments in the future – for example, if you believe your income will increase before the interest-only period is up.

A checkered past

Interest-only mortgages have been around for decades, but for the most part they weren’t attractive to the masses. Typical borrowers were often affluent homeowners who viewed their homes as part of an investment portfolio: interest-only mortgages provided the opportunity to seek better returns with the capital that would otherwise have been used to make a higher mortgage payment.

Then came the housing bubble of 2004 – 2006, when lenders started approving interest-only loans for unqualified borrowers who wanted to keep mortgage payments low while trying to flip houses as quickly as possible. After the bubble burst in 2008, the market for interest-only loans went dormant for several years – and these products were left with a less-than-favorable reputation.

The opportunity today

Between the current economic environment and the advent of new interest-only loan products, this type of loan is once again worth considering for some borrowers. Again, the main stipulation is that you’re not biting off more than you can chew – meaning you expect to be able to handle the increase in payments once the interest-only period is up.

If you meet those criteria, here are a few advantages to consider:

1. Lower upfront monthly payments.  Because you only pay the interest that is accruing on the mortgage, initial monthly payments are substantially lower than if you were also paying the principal. For example, on a $1 million, 30-year, 4% fixed mortgage, the initial monthly payment would be $4,774 – with about $1,440 of that going to principal. On an interest-only mortgage with the same criteria, the monthly payment would be $3,333.

2. Tax-deductible payments.  Generally speaking, you can deduct 100 percent of your interest-only mortgage payments,as long as the total deduction is on debt less than $1 million. On the other hand, mortgage payments that include payments on both principal and interest are only deductible for the amount of interest paid. In the example above, for each month’s payment of $4,774, only the interest portion ($3,333) would be deductible.

3. Rent vs. own.  As rents continue to skyrocket in metropolitan areas, many people would rather put that monthly check toward a home of their own. For example, the median monthly rental for a one-bedroom apartment in San Francisco is about $3,500. With interest-only mortgage rates currently hovering around 4 percent, payments on a $1 million mortgage would be less than the cost of renting. Factor in the tax deduction benefit, and buying a home becomes even more attractive.

4. Seek higher returns.  There are situations where paying down the balance of a mortgage may not be the most efficient use of capital, specifically when funds can be allocated to higher-yielding investments. Much like the savvy borrowers in the early days of interest-only loans, you can take advantage of the flexibility afforded by lower mortgage payments to seek investments with higher returns. This advantage makes an interest-only mortgage a compelling choice for long-term wealth building.

The takeaway

Forecasts for 2016 and beyond include rising interest rates, increasing housing prices and the continuing escalation of the cost to rent. These factors make 2016 look like an opportune time to buy a home. If the structure of a traditional mortgage has prevented you from buying a home, an interest-only mortgage may provide a solution that helps make that happen in the near future.

Download the SoFi Guide to First Time Home Buying to get valuable tips on these topics and more. Our guide also demystifies modern mortgage myths around down payments, the pre-approval process, student loans, rising interest rates, and more.

mortgagemortgage


ABOUT Dan Macklin Twitter: @macklindan Dan Macklin is a co-founder of SoFi and former VP of Community & Member Success. Dan holds an M.S., Management degree from the Stanford Graduate School of Business where he was a Sloan Fellow. He also holds a B.A. in Business Economics from University of Durham in England.


14 thoughts on “Is an Interest-Only Mortgage Your Ticket to Buying a Home in 2017?

  1. Mike Svoboda says:

    I have 2nd at $132,000 used for medical school
    For are son, due nov. 2016 what would optionsay
    Look like?
    Thanks

  2. How can this loan work for someone who does not have a great credit score? Or is it even available to someone with a low credit score?

    • Hi Vicki – credit score is only one factor we take into consideration when evaluating a mortgage application. You can take a look at our Eligibility Criteria to see what we look for in our applicants, and reach us at 855-456-SOFI with any questions.

      Our online application is quick and easy, so you can see if you’re pre-approved within minutes. Check it out here: https://www.sofi.com/mortgage-loan/

  3. Pingback: ADJUSTABLE RATE MORTGAGE (ARM) VS. FIXED RATE MORTGAGE: UNDERSTANDING HOME LOAN OPTIONS | youmortagage.us

  4. Carlos R Avila says:

    70 years old married couple looking for a one bedroom condo or house. Very good credit rating. preferably in the Miami ,Fl suburbs.

  5. What loan programs are currently available re interest only refinance loans? 5-year interest only? 7-year interest only? 10-year interest only?
    Thank you!

    • Hi Patty – We have a 7/1 interest only. It’s fixed rate for 7 years but interest only for 10. And amortizes over 30 years (a 40 year term) to help with payments.

  6. I have few investment properties (residential). Does SoFi offer this for investment properties in NJ?

  7. can I refinance my current mortgage into interest only mortgage ?

    • Hi Billy – Thanks for your interest in SoFi! We’d recommend reaching out to our mortgage department at (844)763-4466 for more info!

  8. Is there some rough rule of thumb whereby it makes sense, for INVESTMENT of the saved capital in interest-only mortgages relative to normal amortized mortgages, to go for the interest-only mortgage IF you assume your investments will need to do ‘X’ % better than the interest rate % of the interest-only mortgage, and you plan on never letting the mortgage reach the adjustable or amortized stage (e.g., a 7/1 arm, where you move within 5-7 years and sell the home). So what would ‘X’ need to be, i.e., how much better do the investments need to do (%) to make it a prudent move to go w/ an IO type??

  9. Are projected principal payments factored into DTI for interest only loans?

Leave a Reply

Your email address will not be published. Required fields are marked *

SSL Encrypted
Equal Housing Lender