Deferred Interest Mortgage
You pay interest on your mortgage....later. Like it just accumulates. And then one day, you pay big. (See: Zero Coupon Bond.)
One of the more surprising customs in the financial world is the fact that there is a pre-payment or early redemption penalty on paying off debt early. You actually get charged extra for paying off a debt before it's due. One would think that most lenders would prefer getting their money back faster, but certain loans are structured for their monthly income streams, and the penalty is a disincentive to stray from the model.
Luckily, the mortgage industry is fairly flexible and innovative in accommodating a range of variable payment structures. Any type of mortgage designed to have either a portion or entirety of the standard interest to be paid later than on a monthly basis is said to be a "deferred interest mortgage." This term includes Adjustable Rate Mortgages and mortgages that deploy balloon payments. Adjustable rate mortgages may entail paying less interest for some months and more other months. Balloon payments often are calculated for a certain rate, but the payments are done in a single, consolidated large lump sum rather than incrementally on a regular calendar schedule.
So the next time you win that lottery, make sure you convert your mortgage to a deferred interest mortgage before making the balloon payment to close it out, or you can get hit with the pre-payment penalty.
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Finance: What is Interest Only Mortgage?17 Views
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
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