Principal Payment On Interest Only?

Ryan is considering a refinance of his home mortgage to an interest-only loan.

QUESTION: Ryan has a house worth $220,000 and he still owes about $180,000.  He has a 30-year mortgage with 6.125% interest and is considering doing a 7-year, interest-only mortgage at a rate of 5.25%.  Is that a good idea?

ANSWER: An amatorizing mortgage pays off exactly as fast as an interest-only mortgage.  The big lie of the interest-only mortgage is that the principle is applied differently, but it is not.  If you take an interest-only loan and pay extra on it, it comes out exactly the same as paying extra on an amatorizing mortgage. 

If you can lower your interest rate by getting a 15-year fixed mortgage, then do that instead.  You’ll save money each year doing that. 

Don’t fall into the interest-only loan trap.  I would never, under any circumstances, take out an interest-only loan.

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