Financial Planning and Interest Only Mortgages
I have observed many 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 simply 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 examine 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 standpoint, 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 money. 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 generally include real
estate, so more than likely this is a business venture 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 quick profit, I don't' believe are candidates for
the interest only mortgage. The interest only mortgage doesn't
offer much in the way of building and growing investment value,
because you simply never increase the value of the asset to you.
You increase the value of the loan for the lending institution,
because 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 many doors unopened and many avenues
unexplored. 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 many "short-term"
considerations open for discussion. The only short-term
advantage to interest only is that your monthly payment is often
very low during the term of the interest only payment.
When you consider the impact your 401(k), an MSA, an IRA, or any
other tax deferred savings or retirement program can have on
your bottom line, the interest only mortgage doesn't really 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 individual
have a one-to-one ratio of tax savings.
Another 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 potential savings be, for you, if you weren't still paying
on a mortgage? The time value of money is a concept that few
consumers ever learn to appreciate. It means the dollar you have
today, will be worth less tomorrow than it is today, therefore
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 asset, and is the only
savings that many consumers have managed to accumulate. If the
only payments you have made were for the interest due on the
principal, you effectively have no accumulated savings. Now,
that might not be an issue for someone in their 20s or early
30s; however, by the time you reach your 40s, you have begun to
contemplate retirement, and ways to save for that phase of your
life.
As I stated earlier, caution and good sound financial planning
may determine that an interest only mortgage will benefit you
greatly. But, I would only consider this option only after I had
taken time for careful consideration and good financial
planning.