Will I get more back on my tax returns if I have an interest only loan vs. a 30 year fixed?

Answer 1

It's the interest that's deductible, so initially it shouldn't have any effect on your taxes (assuming the interest rates are the same of both loans). After awhile, the interest only loan will give you more of a deduction, but that's because you're paying more interest because the balance isn't being paid down like would happen on a regular fixed mortgage. Personally, I would not consider that to be a good thing because the amount you save on taxes will be only a fraction of the amount of extra interest you are paying.

Answer 2

First, It depends on your rate (of course). It's only the interest that's tax deductible. Second, since the interest calculated used the LOAN AMOUNT, interest would be the same. For example, on a 300,000 I/O loan with 7% interest, the interest over the life of the loan would be the same throughout the life of the loan. The interest amount does not change with your principal. Now if you get an addjustable rate I/O, the interest will change based on whether its a regular ARM versus a LIBOR. I/O loans are riskier (that's why they have higher interest rates than fixed loans), so it's better to stick with a conforming fixed (if you have the credit and debt to income ratio to do so). In the long run, if you got an I/O, the tax breaks you'd get would be the same as a fixed (considering the interest rates are the same for both).

Answer 3

I will assume both loans have the same interest rate. Each payment on the 30 year loan reduces the principal by a (initially) small amount. The means you pay slightly less interest each payment. Because you pay more interest on the interest only loan, you will get a larger tax deduction.

Now for the REAL math. The HIGHEST federal tax bracket is 35%. If you pay $10,000 in interest, you 'save' no more than $3,500 in taxes. That means you gave the BANK $10,000 to avoid giving the IRS $3,500. Your still out $6,500. If you think that is a good idea, send ME $10,000 and I'll send back $4,000. You are $500 ahead, and I will pay off my house in 10 years.

Answer 4

Sort of. If you pay more interest (which you probably would on an interest-only loan) then you'd have a bigger deduction since you'd be paying more interest, which would lower your taxes but not anywhere near the amount of the additional interest you'd pay.

Answer 5

No. Your payments will be lower because you are not paying any of the principle. But as long at the interest rates are the same on both loans, you will pay the same amount of interest and get the same amount back on returns.

Answer 6

why does that matter? the money you would not be getting back on the 30 year fixed would be going into your equity. you also have to consider risk in the equation. FIXED means FIXED=no risk. interest only means variable rates could mean in a few years that your paying double the original payment.