Why You Will Love to Finance Using A Zero Interest Loan?
The Interest Only Loan-Virtually is one of, if not the best, for overpaying!
Each month its re calculated, meaning that if you give a constant overpayment, it will be decreasing the loan’s fully amortized payment and balance.
Unlike a fixed rate loan, this will pay the loan off faster. It will also result in a lower regular payment should you stop the overpayment!
The Key is for you as a borrower TO do SOMETHING CONSTRUCTIVE with the MONEY YOU SAVE.
At the the end of 5 years (because these things are usually maxed out at the end of 5)
Then AT THE VERY LEAST you are going to owe what you borrowed today.
Why would you ever want a loan like this?
#1
Tax Benefits
(All Interest = 100% Tax Write Off)
#2
Less up Front Cashflow
(Monthly Payment or Insurance Requirements)
#3
Future Equity (Appreciation) of the Property
The only downside is most people are not disciplined enough to "do something" with the diffrence.
Personally prefer the UP FRONT benefits of the COFI loan, Hell its hard to aurgue with the rate.
If the borrower is wise enough to responsibly use their deferred interest feature, then it can be an excellent loan!
However; If the borrower burns their cash, the Neg-Amortization feature is a slow POISON TIMEBOMB.
Given that the COFI is a slow moving, lagging index, I suggest that when the economies start perking up again in 2-5 years you should consider refinancing into a new program that makes the most sense at that time
(which will likely be a COFI ARM.)
Talk to your lender and tax professional about your particular savings in doing it this way, and all the financial advantages, and get them to confirm for you that EVEN AFTER PAYING ANOTHER ROUND OF CLOSING COSTS this is the best way for you to go.
PS. Someone told me that Greenspan has either the Cosi/Codi on his own home loan. If that´s true that is a good sign of this paarticular loan program it´s like being your own banker.
Derrick Ali
Derrick,
I fully comprehend the income tax ramifications of mortgage interest. However, that was not the point of your original comment and of my dissenting opinion.
Originally. you were discussing the merits of an interest only loan and you said:
Each month its re-calculated, meaning that if you give a constant overpayment, it will be decreasing the loan’s fully amortized payment and balance. Unlike a fixed rate loan, this will pay the loan off faster.
It is this comment with respect to "amortization" that I take exception to. Start with a fixed-rate loan and an interest only loan for the same loan amount and the same interest rate. Now make the same monthly payment (to include the overpayment on the interest only loan) on both loans and run the amortization tables. You will see that both loans "amortize" at the same rate. It is on this point that I maintain there is no difference between an amortizing loan and an interest only loan.
Dave,
1) Do you (or does anyone else reading this) have an Excel template (or other program or a URL) designed for an interest only loan with "extra" payments? In fact, I suppose the ideal template would offer a _comparison_ of a 30 year fixed vs. 30 year interest only loan (or whatever the term).
The various standard amortization templates I have the following limitations when used with interest only loans:
- they are not designed for interest only loans so they do not calculate the correct minimum payment.
- they do not have provision for the fluctuating interest rate and the periodic recalculation of the minimum payment amount in interest only loans.
2) You quoted Derrick as saying "Each month its re-calculated, meaning that if you give a constant overpayment, it will be decreasing the loan’s fully amortized payment and balance. Unlike a fixed rate loan, this will pay the loan off faster. "
The zero interest loans I have seen have the monthly minimum payment recalculate EACH YEAR on the loan's anniversary date. Do you know if some of the zero interest loans actually recalculate the minimum payment each and every month?
3) You assert the loan payoff date will be the same given the same interest rate and payment amount. Have you confirmed this by running the numbers?
Thanks,
misterbeanfan
Derrick,
I'm lost. Your article's title suggests your are talking about ZERO interest loans, but the content avoids the topic entirely and focuses on interest only loans and ARMs.
Then you go on to say:
Each month its re calculated, meaning that if you give a constant overpayment, it will be decreasing the loan’s fully amortized payment and balance. Unlike a fixed rate loan, this will pay the loan off faster. It will also result in a lower regular payment should you stop the overpayment!
I submit that there is no difference between paying down the principal on an amortizing loan and on an interest only loan -- given the same payment amount, the same loan amount, and the same interest rate.
My Faux Paux with regard to the article's titke, However while you submit to there being 'NO DIFFERENCE' I beg to differ!
You see Mortgage Interest Deductions reducesone's Tax liability and further by having a Interest Only paytment schedule the borrower has 100% of every monthly mortgage payment go towards this Tax reduction.
This type of borrowing works best for investors and high income (38%) bracket wage earners.
Sorry for the confusion(Zero Interest Loan vs. and Intrest Only)!
Hope this helps!
Derrick
Derrick,
I fully comprehend the income tax ramifications of mortgage interest. However, that was not the point of your original comment and of my dissenting opinion.
Originally. you were discussing the merits of an interest only loan and you said:
Each month its re-calculated, meaning that if you give a constant overpayment, it will be decreasing the loan’s fully amortized payment and balance. Unlike a fixed rate loan, this will pay the loan off faster.
It is this comment with respect to "amortization" that I take exception to. Start with a fixed-rate loan and an interest only loan for the same loan amount and the same interest rate. Now make the same monthly payment (to include the overpayment on the interest only loan) on both loans and run the amortization tables. You will see that both loans "amortize" at the same rate. It is on this point that I maintain there is no difference between an amortizing loan and an interest only loan.
For example: $100,000 loan, 6% interest, 30 year fixed, payment=$599.55
Same information but I/O rate equals 6%, payment= $500.00.
You can apply the extra $100 towards your prinicpal thus paying off the loan more quickly. In fact, the interest rate on the I/O loan would have to be 7.125% for the monthly payments to be equal. You wouldn't have to pay towards the prinicpal you could take the extra money and invest it in stocks or something that could give you a higher return tus leaveraging your money even more.