BiggerPockets

Does anybody have an opinion on using an interest only loan on their primary residence? The logic behind this is that by using an interest only loan you will be able to use the savings to invest elsewhere and be able to write off the interest to save even more....or so I have read. In my situation, we will probably not stay in the next house we are going to buy for more than 3 years. So I was thinking we could just refinance at the time we did have to start paying principle or sale the home. I would love opinions on using this strategy versus using conentional 30 yr fixed financing.

-Madison

Good point. I was just reading an article on that very issue this morning. Is there really a significant savings between conv. and interest only? I have read that you will only save approx. $200 a month with a principle of $200k (which is about 10-20k more than what I want to spend)....the higher the principle the more you save. I have not found an ammortization calculator that does interest only loans. Do you know of one?

Vs. a payment of $1199.10 for 200K, 6%, 30yr loan. With the 30 year loan, your balance after three years would be $192,168 vs. $200,000 with the IO loan.

With an IO loan, you're really betting on appreciation. If you're really planning to sell in three years, and you get 3% appreciation, you'll be able to sell it without having bring money to the table (200K, 3%, 3 years = $218.5K. Closing costs about $17.5K) If you get 10% appreciation and the house is worth $266K, then the $9K paydown isn't very significant.

Consider, though, and falling or flat prices are, IMHO, a very real possibility over the next few years. I bought a house in Bakersfield CA in 1995 for $239.5K. I sold it in 1999 for $239K, but with about 6K in concessions to the buyer. I believe the people we bought it from paid about $280 a few years before we bought it. That house was STILL worth $240K in 2003, although its worth double that now. That's eight years with ZERO appreciation. What will it be worth in three years? Who knows, but my money's on it being worth less than it is now.

If that was to happen with your IO loan, you would have to bring a big pot of money to the table to sell. Or, stay in your house and hope the price comes back up. You probably wouldn't be able to refi without putting money on the table. At least with an amortizing loan your paying down the loan. Slowly at first, but faster over time.

That was the plan...to invest in more RE. I am pretty thrifty and so is my wife, so spending the savings on junk wasn't even a consideration. So, would the whole monthly payment (the interest, taxes and insurance) for the house be tax deductible? This year it wouldn't really help us out, but I was wondering if we could carry the deductions over to next year?

I'm still not sure if I/O or ARM's are good for short holds(flipping) where you'll sell before the low int. rate changes; or the market drops.

(if house depreciates) you would have to bring a big pot of money to the table to sell.....At least with an amortizing loan your paying down the loan

Instead of putting the money into principal, it can be invested; then there's that money - and then some - to bring to the table. If your house depriciates, does it really matter how much your paying down the principal?