Worthwhile to go 30-year IO (interest only) just for the tax deduction?

Question

If you had to choose between 30-year fixed at 7% and 30-year interest only at 6.5%, would you go for the interest-only mortgage solely for the tax deduction?

By the way, I have *no* idea if there even is such a thing as 30-year IO. I know of 10-year IO on 30-year period, but not an entire 30 years of just interest only.

Answer 1

Here we go.
You are correct that the longest IO available on the market is 10yrs long. If you are looking for just the tax deduction I would say it would be a poor choice to go with the IO. Also, IO is not negatively amortized, you are just paying interest and not principal.
Think about your options like this:
If you can afford and would like to own your property free and clear in exactly 30 years from now get the 30yr Fixed. It's safe and eventually you will own your property.
If you think that you're going to refinance in less than ten years it might make sense to go with the 10 year IO. With the 10 year IO you will have lower monthly payments so theoretically rather than paying that principal down you get to keep that extra money in your pocket (or your IRA). Also consider that over the course of the next 10 years your property will more than likely appreciate, right? And you'll probably want cashout for debt consolidation, a new investment property, a new business or some other expense so you might as well leverage your money to optimize your house as an asset. Or maybe just keep low payments for 10 years and then sell.
There are lots of variables however my point is (1) don't do anything JUST for the tax deduction and do what feels right for you. I don't know your exact situation so I am not able to give you perfect advice but you're on the right track.
It starts with asking good questions (you've got that far).
Tax deduction is a plus but more than likely for the first 3-4 years you'll end up getting a bigger tax deduction from the 30 year F at 7% anyway.
The choice is yours.
Check out the calculators at the site below for reference.
If you have any questions I am a CA mortgage broker so feel free to ask me or another proffessional with your best interests in mind.

Answer 2

I dont understand the rationale of paying more interest as being a good idea.

The tax benefit? The tax man says "give me $1 and I will give you 33 cents back," how is that a good deal?

I take the lower interest and paydown the principal as though it was a fixed @6%.

The rationale that paying more interest because it is a tax deduction just doesnt make sense to me.

I have a 15 yr fixed @4.25% - I would never trade that loan in to get a bigger tax write off. Its not like you can write off mortgage interest dollar for dollar.
Your basically renting your house because your principal never goes down. You only gain equity if the house increases in value. That's a gamble.

JMHO

Answer 3

For what its worth, if your in the 28% tax bracket and based upon a 200K loan the 7% amortizing loan gets you back $261.99 more tax refund than the interest only loan will during year 1. Another bad feature with I/O loans is that should it live beyond 10 years then it can be recast to payoff itself in the last 20 years. So,after making 10 years of payments, the new payment can increase by nearly 18%.

Answer 4

You are going to get a tax deduction on your mortgage no matter what kind of loan you have. Interest only is intended for people, so they have a lower payment to start out with. It is only for a short term. You couldn't have a 30 year interest only, because you would never be paying on the principle, only the interest. Interest only is going to give you negative amortization. It effects your equity in your home. I wouldn't do interest only unless the payments are going to be to high for you starting out.

Answer 5

It really depends on your goal on the property. Is this your primary residence, do you plan on living there the next 10 years, will you be selling it anytime soon? Are you concerned about any equity in the property - when you pay interest only, your payment is lower but none of your payment goes to principal. That means your loan balance never decreases. Will you need to refinance in the future? I'm surprised the rate is lower for interest only, instead of a fixed rate, which is generally lower.

Answer 6

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