Fully Amortized Mortgages Considered Harmful

Update: Stop reading this now. It’s drivel. It was written by an idiot. (me)

I’m doing it. I’m refinancing my house to an adjustable rate interest only loan.

Now that I’m on this side of the fence, I can’t believe that we little people, the not-banks, put up with such ridiculous risk. It’s a form of oppression brought on by financial ignorance.

When you give (just being pedantic) a 30 year fixed mortgage on your little ol’ homestead, the lender works out a payment scheme for you whereby you pay down the debt secured by your house “automatically” over the course of 30 years. You don’t have to think about it. Just make the minimum payment and 30 years later your home is paid off.

It’s a rip-off.

It’s a pretty well known fact that when you make your first year of $1000+ payments on your mortgage, you probably only pay down about, what, $1200 of your debt. Somewhere around 90% of your payments went to paying interest on your loan. If you keep it up for several years, your payments start to make a bigger dent in the principal of the debt, until near the end of the 30 years most of the payment actually pays down the mortgage.

Folks have invented a few feeble methods for knocking down the debt faster. You can make payments larger than the minimum payment. That money goes to the principal. Some folks who are more clever make two half payments per month. That cuts a number of years off the loan.

But what if you lose your job?

If you have an interest only loan your minimum payment is lower. You can weather a tough financial time by paying interest only and make up the difference in missed principal when your position strengthens.

If you were to get an interest only loan and make the equivalent amortized payments for a couple years and then lose your job, you’ve paid down more principal so your position is stronger if you should need to sell the property securing your loan.

I’m going all out and getting an adjustable rate. This is going to free up a lot of cash flow for me. I’m going to invest that cash flow in the marketing associated with my investment strategy. I expect to be able to pay down the principal of my loan with a combination of small payments made consistently and larger payments made periodically as I close deals.

This flexibility would not be possible if I locked myself into an amortized loan.

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2 Comments on “Fully Amortized Mortgages Considered Harmful”

  1. Maddyo Says:

    This guy is an example of those that probably have the foreclosure sign stuck in their front yard.

  2. KeyifKafe Says:

    Folks have invented a few feeble methods for knocking down the debt faster. You can make payments larger than the minimum payment. That money goes to the principal. Some folks who are more clever make two half payments per month. That cuts a number of years off the loan.


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