AllFinancialMatters

A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.

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Friday, June 17, 2005

The True Cost of an Interest-Only Mortgage

Yesterday I compared 15, 30 and 40-year mortgages. Today I wanted to look at some numbers regarding interest-only (I/O)mortgages. Yesterday's Wall Street Journal had an article about I/Os. I put a table together using the numbers laid out in the article.

Amount Financed

$200,000

Loan Term (Years)

30

Interest-Only Period (Years)

15

Interest Rate

5.50%

Initial Interest-Only Payement

$917

Payment After Interest-Only Period

$1,634

Interest Paid During I/O Period

$143,384

Interest Paid After I/O Period

$94,150

Total Interest Paid

$237,534


Based on this example, this person would pay nearly $29,000 more in interest using the I/O loan than they would had they used a traditional 30-year fixed loan. I/O loans should ONLY be considered by those who can afford the payment after the I/O period. Unfortunately, I don't think that's the case with most of the people using I/O mortgages.

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