Subprime Lender

Finance allah shmoop what is an interest only mortgage Well

simply put it's when you only pay the rent on

the dough you borrowed you don't pay down the principal

you owe like if you have a three hundred thousand

dollars mortgage at six percent interest you're paying eighteen grand

a year to rent that money in six percent times

three hundred rands eighteen grand a year But the principal

you borrowed is likely due in thirty years So in

theory anyway if it were a normal mortgage you'd want

to pay down the principal little bit a month as

you go along like averaging ten grand a year in

principle pay down over thirty years That's times ten grand

right three hundred grand their total owning your home at

the end yeah yeah priceless that's what holmes work So

why would you want an interest only mortgage Well for

one thing the monthly payments or less so maybe you

could afford morehouse If on a thirty year three hundred

thousand dollar loan at six percent you're paying interest only

while you're writing a check each month for eighteen thousand

divided by twelve or fifteen hundred bucks maybe that's all

You can afford well the extra five hundred bucks arm

or you'd right toe pay down your principles Just not

something you can really do right now Maybe after three

years of scrimping and saving well you'll be able to

start paying down that principal reducing risk and making life

easier all the way around But right now you can't

afford it so the only thing you can do is

do the interest only dance Well the other reason you

might want an interest only mortgages that interest costs are

tax deductible Principal pay down costs are not so if

in a given mortgage payment of say eighteen hundred bucks

a month where three hundred of it is principal pay

down and fifteen hundred of it is interest well on

ly the fifteen hundred is tax deductible That three hundred

of pay down is not And if you're a forty

percent taxpayer the government is essentially picking up the tax

savings on the fifteen hundred times a forty percent at

six hundred dollars in interest You're paying such that they

quote feel unquote like the fifteen hundred is really only

about nine hundred a month in cost to you the

three hundred bucks and principal paydown feels like a full

three hundred dollars So some people seeking tio optimize their

tax deductions live in the world of interest only mortgages

and let the government for a change You know work 00:02:26.24 --> [endTime] for them How's that feel same all Take it