– Interest-only Mortgages - Leaving Principal Out
of It
– Parents as Partners in the Housing Game
– Home Away from Home
Interest-Only Mortgages - Leaving Principal Out of It
What if you could pay only the interest on your mortgage loan for the first few
years? Interest-only loans allow you to do just that. But these loans are not
for everyone. Here’s a look at what they are and who might benefit from
them.
Less Now, More Later
Interest-only loans allow you to make only the interest portion of your mortgage
payment for a certain period of time—usually five, 10, or sometimes 15
years. Your monthly mortgage payment is lower during that time, since you’re
not paying on the principal. When the interest-only period ends, you begin repaying
principal over the remaining loan term. Typically, your mortgage payment will
then increase significantly.
Who Can Benefit?
What type of borrower might benefit from an interest-only loan? Home buyers who
want low payments and expect to sell or refinance their homes before the interest-only
period ends may be good candidates. Wealthier home buyers who plan to invest
the cash that would have gone toward the principal may also benefit from the
interest-only feature. A third group of home buyers who may benefit are individuals
whose income varies throughout the year, such as small business owners, people
who work on commission, freelancers, and employees who receive significant year
end bonuses. Borrowers can make minimum monthly payments and contribute toward
the principal as their incomes permit. In any case, choosing an interest-only
mortgage should be part of a well-thought-out financial strategy. Keep in mind
that you’re not building equity with interest-only payments, so all borrowers
should consider paying something toward the principal, if possible.
Parents as Partners in the Housing Game
Many parents help their kids buy a first home by contributing to the down payment
or cosigning for the mortgage loan. But here’s an idea for helping out
that you may not have thought of—co-ownership. With co-ownership, you and
your child buy a house together. Under this arrangement, your child may qualify
for a loan even without a substantial prior credit history.If you were thinking
of giving money to your child anyway, you may find co-ownership a better option.
What’s in It for Me?
Typically, co-ownership arrangements specify a time frame for your child to buy
out your interest in the property. In the meantime, you agree to split the taxes,
interest, and other property expenses and to share any gain from the sale if
the house is sold. Your child occupies the house, and you potentially gain a
write-off on your income taxes while adding some diversification to your investments.
What Can Go Wrong?
What happens if you and your child have a falling out or if your child and a
spouse divorce during the coownership arrangement? If there’s a dispute,
dividing the property could become a financial nightmare that may involve going
to court. There can be benefits to co-ownership, but proceed cautiously, and
make sure your agreement spells out all the details.
Home Away from Home
If your son or daughter is starting college in the fall, you know
that college costs — especially at private colleges—have risen
sharply. One way to lower college costs is to reduce the amount you pay for
room and board. And one way to do that is to buy a house or apartment building
near the school. Your child could live there and you could rent out the extra
bedrooms or apartments to other students. The idea of a home away from home
might appeal to your student—and may make good financial sense for you.
Benefits of Buying a Rental
Buying rental property for their children to live in during college has worked
for many parents.
Benefits may include:
• Rental income helps offset the cost of mortgage, insurance, property
taxes, and maintenance
• Income-tax breaks
• Nicer accommodations
• Roommates can be individually chosen
• Property may appreciate
Drawbacks of Buying a Rental
Every situation is different, and what works for some families may not work for
yours. Carefully consider the following drawbacks. If they apply, you may want
to look into another strategy to lower your college costs. Drawbacks may include:
• Costs may exceed rental income
• Student has no interest in being a landlord
• High-income families may get less of a tax benefit
• Child may not stay at the same school for all four years
• Neighborhood may have a poor real estate appreciation rate.
Talk to your financial professional to see if buying a rental property for your
college student makes sense for your situation.
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