I am planning to take 30 year term 10 year interest only mortgage. I know following are pros can cons of this approach:
- possible free money, especially given low interest rates
- lower payments (wrong reason to do it)
- more liquidity and options in your money
- chance for significant gains if you have cash to pay for house and can funnel most "interest" payments to Roth IRA or 401K
- no issue with variable rate if you don't plan on being there long
- usually interest rate for this plan is low (usually 0.5% less )
- If for 10 year, I only pay interest, my principal amount will still be same as what I applied for on day 1. Now I am locked with same lender, it limits my refinance options.
The loan does not have any penalty for pre payment.
I have following questions with respect to 10 year interest only plan:
- Can I make any number of additional payments towards principal & hence reducing overall loan total?
- With this plan, does any additional payment fully reduce the principal and nothing goes towards interest?
Look at below screenshot which compares three plans:
- Mortgage where you pay both interest and principal (Cell A to E in screenshot)
- Interest only (Cell K to M in screenshot)
- Interest only (Cell N to P in screenshot) but you on your own (no obligation) pay some money towards principal very month (I will pay $775 per month). If I pick this option, at the end of four years I would have saved a little over $6000 when compared with option 1.
I am thinking of using option three. As there is no obligation on me to make additional payments towards principal. My plan is to still pay same amount every month using option 3, that I would have done using option 1. Are there any downsides which I am not seeing?