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

00:00

Finance allah shmoop what is an interest only mortgage Well

00:07

simply put it's when you only pay the rent on

00:10

the dough you borrowed you don't pay down the principal

00:14

you owe like if you have a three hundred thousand

00:16

dollars mortgage at six percent interest you're paying eighteen grand

00:19

a year to rent that money in six percent times

00:22

three hundred rands eighteen grand a year But the principal

00:25

you borrowed is likely due in thirty years So in

00:28

theory anyway if it were a normal mortgage you'd want

00:32

to pay down the principal little bit a month as

00:34

you go along like averaging ten grand a year in

00:37

principle pay down over thirty years That's times ten grand

00:41

right three hundred grand their total owning your home at

00:44

the end yeah yeah priceless that's what holmes work So

00:47

why would you want an interest only mortgage Well for

00:51

one thing the monthly payments or less so maybe you

00:54

could afford morehouse If on a thirty year three hundred

00:57

thousand dollar loan at six percent you're paying interest only

01:00

while you're writing a check each month for eighteen thousand

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divided by twelve or fifteen hundred bucks maybe that's all

01:06

You can afford well the extra five hundred bucks arm

01:09

or you'd right toe pay down your principles Just not

01:12

something you can really do right now Maybe after three

01:15

years of scrimping and saving well you'll be able to

01:18

start paying down that principal reducing risk and making life

01:21

easier all the way around But right now you can't

01:24

afford it so the only thing you can do is

01:26

do the interest only dance Well the other reason you

01:28

might want an interest only mortgages that interest costs are

01:31

tax deductible Principal pay down costs are not so if

01:37

in a given mortgage payment of say eighteen hundred bucks

01:40

a month where three hundred of it is principal pay

01:43

down and fifteen hundred of it is interest well on

01:47

ly the fifteen hundred is tax deductible That three hundred

01:51

of pay down is not And if you're a forty

01:53

percent taxpayer the government is essentially picking up the tax

01:58

savings on the fifteen hundred times a forty percent at

02:02

six hundred dollars in interest You're paying such that they

02:05

quote feel unquote like the fifteen hundred is really only

02:10

about nine hundred a month in cost to you the

02:13

three hundred bucks and principal paydown feels like a full

02:16

three hundred dollars So some people seeking tio optimize their

02:19

tax deductions live in the world of interest only mortgages

02:23

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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