Interest Only or Amortized Mortgage

Interest Only or Amortized Mortgage.

Interest-only or amortized mortgage is a very common question. Firstly, interest-only mortgages typically exist in the private mortgage world. You may require a short-term private mortgage and have the option between an interest-only or amortized mortgage.

Although most would prefer having their mortgage amortized over 10-15 years as opposed to 20-25 years as it would mean being mortgage-free that much sooner, a lower amortization often results in a higher payment.
Your net income may only support a certain monthly payment which means that you might need to select a longer amortization to keep payments affordable (even though you want a lower amortization in order to be mortgage-free much sooner).

Below you will find an illustration of a monthly payment for a $350,000 mortgage @ 3% interest calculated semi-annually:

10 Year Amortization: $3,376.63
15 Year Amortization: $2,413.91
20 Year Amortization: $1,937.84
25 Year Amortization: $1,656.36
30 Year Amortization: $1,472.11

You’ll notice that you will need to make double the monthly payment in order to pay off this mortgage 15 years sooner (10 years vs. 25 years).

On the other hand, an interest-only payment is only $875 a month. Granted there is no principal reduction with an interest-only mortgage, but the lower monthly payment may increase your cash-flow.

The monthly payment on a $350,000 mortgage at 6.50% interest-only calculated monthly is $1,895.83  this is less than the monthly payment for $350,000 at only 3% amortized over 20 years.

By the way, the same $350,000 at 6.50% calculated semi-annually and amortized over 20 years is $2,591.75 a month.

That is a difference of $695.92 per month which equates to $8,351.04 over 12 months.

Note that a 20-year amortization would reduce the principal by $8,912.07 over the 12 months.

As much as it always boils down to cost and sense…. there’s a bit of a gut decision to some choices. You might prefer to pay $8500 less from your pocket over the year, than pay-down $8K in principal.

To each their own!

Contact us anytime for more information.

DV Capital Corporation #13186
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