Interest-Only ARM

Simply put, it’s when you only pay the rent on the dough you borrowed; you don’t pay down the principal.

Like…if you have a $300k mortgage at 6% interest, you’re paying 18 grand a year to rent that money. But it’s likely due in 30 years, so (in theory, anyway) if it were a normal mortgage, you’d want to pay down the principal as you go along.

Like averaging 10 grand a year in principal paydown. Thirty years. Times 10 grand. That's $300k. Owning your own home. Yeah. Priceless.

So why would you want an interest-only mortgage?

Well, for one thing, the monthly payments are less.

If on a 30-year, $300k loan at 6% you’re paying interest only, you’re writing a check each month for $18k divided by 12, or 1,500 bucks. Maybe that’s all you can afford. The extra 500 bucks or more you’d write to pay down your principal is just not something you really can do right now. Maybe after 3 years of scrimping and saving, you’ll be able to start paying down that principal, reducing risk and making life easier all the way around.

The other reason you might want an interest-only mortgage is that interest costs are tax-deductible; principal pay-down costs are not.

So if, in a given mortgage payment of, say, $1,500 a month, where $300 of it is principal paydown and $1,200 is interest, only the $1,200 is deductible. And if you’re a 40% taxpayer, the government is essentially picking up $480 in tax savings on the $1,200 in interest you're paying, such that you "feel" like the $1,200 is really only $720 a month in costs to you.

The $300 in principal paydown feels like a full $300, so some people seeking to optimize their tax deductions live in the world of interest-only mortgages and let the government, for a change, work for them.