Now let's look at the interest only loan and compare it to a fully amortize loan, preferably the 30-year fixed. The 30-year loan will amortize about 12% in the first 10 years. On a $300,000 loan at 6%, you will have a balance of approximately $260,000 after the first decade of the loan. If you were to take an interest only loan at the same balance and rate, you would save $36,000 in actual payments, or almost the same as what was amortized. If you invest your savings stream you might be way ahead of the game.
There are two ways to make money in real estate: amortization -- paying down the loan until it is gone (30 years) or having the house go up in value, which is by far the major way people make money in real estate. If you were really interested in amortizing your loan, you would take a 10, 15 or 20-year fixed, not a 30-year.
Now, let us take a look of the benefits of an interest only loan, other than lower payments. If you own rentals, then interest only gives you the lowest positive payment you can get and it will enable you to enhance your rental income.
If you are self employed, a commission salesperson or receive a nice bonus each year, then you can enjoy low monthly payments and when you receive a good amount of money, you can pay it in against the principal. Besides paying down the loan, it will reduce the monthly payment subsequent to the pay down, as interest only loans are based on the actual balance of the loan, not the beginning balance.
The message is simple: Don't disregard a loan because a group of people tells you it is dangerous for you to consider. Investigate for yourself and see if this loan is the best way for you to maximize your particular situation. Blanket statements are at best a warning for you to check out every aspect of a particular strategy, and at worse, a total disservice to all.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom. Roger is the President and founder of Manhattan West Mortgage.