Interest-only mortgages provide investment opportunity with strings attached
While some buyers take out interest-only mortgages simply to get into a house, others do it so they can invest the extra couple hundred bucks. It's a good idea, but only if you're disciplined enough.
Special to The Seattle Times
Almost every dollar Todd Asher earns is spoken for. He has one daughter in college, another in high school and a toddler in diapers.
"We made a decision to have my wife stay at home with our 18-month-old son, so we're living off my income, paying for tuition, diapers and everything else," said Asher, of Sammamish. "We're all about making money go as far as possible." Asher, 39, has found a way to save a little each month through an interest-only mortgage loan. He diligently puts the savings into his 401(k), an individual retirement account and mutual funds.
"My goal when we purchased our current home was to buy the most house for the least amount of money and then save, save, save," Asher said.
Some mortgage specialists and financial planners believe unconventional home loans could be good tools to help consumers put away money for their future — if they're disciplined enough to invest the mortgage savings.
If homebuyers invest the extra $160 to $200 they save each month on an interest-only mortgage, then it "absolutely makes sense," said Jeff Tisdale, a broker at Skye Mortgage in Bellevue.
That doesn't happen often.
"People tell me all the time about how they plan to put the savings here or invest it there," Tisdale said. "The money instead goes into six bottles of wine or a Jet Ski payment."
What to do with $200
Savings from an unconventional mortgage compared with a standard 30-year fixed-rate mortgage might slip away because people don't think it's enough money to make a difference.
But Paul Merriman, founder and president of Seattle-based Merriman Capital Management, said every dollar a young homeowner invests now from mortgage savings will make a surprising difference when he or she retires.
Consider this scenario: A 30-year-old homebuyer invests $200 a month in a Roth IRA for five years. With a 10 percent compound rate of return (based on the S&P 500), he will have $15,312 in five years. Then, because he faces a higher mortgage payment of principal and interest, he stops contributing to the IRA. Even if he adds nothing more to the investment, the money continues to multiply.
"They will have $267,185 at age 65 and they will be able to take tax-free distributions of $16,031 (6 percent) the first year," Merriman said. "If they continue to earn 10 percent while taking out 6 percent, they will take out over $500,000 and have $585,435 left at age 85."
At a more conservative 6 percent rate of return, the homeowner would have saved $14,000 after five years, Merriman said, and that would grow to more than $82,000 over the next 30 years. Withdrawing $5,000 a year during retirement would leave $82,000 at age 85.
Not bad for a five-year savings plan that started with investing the difference between a standard mortgage and a 30-year interest-only loan.
Merriman, who is also editor and publisher of fundadvice.com, said there is an obvious impact of saving and investing early in life.
But some borrowers are oblivious to what's obvious.
The job of a mortgage broker has changed since Debbie Steck started in the mortgage business in 1978.
A decade ago, a counseling session with borrowers amounted to little more than reminding homebuyers to bring bank statements and pay stubs at closing.
Steck, now the western regional manger for Golf Savings Bank based out of the Mountlake Terrace branch, said today's loan officers are financial advisers, too.
"Financial counseling should be our only job," Steck said. "Borrowers can fill out a loan application online, but the lowest rate on the wrong loan is a bad buying decision. Our job is to put people into the loan that makes sense for their needs."
Homebuyers, especially first-time borrowers, are more educated now because mortgage information is available on the Internet, she said.
Are borrowers following loan officers' financial advice? Do people have the tenacity to invest mortgage savings every month?
"People aren't as responsible as we'd like them to be," Steck said. "It seems their money always goes somewhere else."
Skye Mortgage's Tisdale is less diplomatic.
"Most people want everything now, and they come back every two years looking for more money," he said.
He also has families who "come back a little richer" each time with more money in the bank.
"I can't keep track of what people do once they walk out my door," Tisdale said. "I can tell you that the ones who are committed to investing their savings are rare."
Linda Thomas is a Seattle-based freelance journalist: email@example.com