Hi,
I have seen a lot of questions and arguments on interest only loans and their explanations but i have not seen the answer to this question anywhere.
Q If you pay interest only for first 5 years on a 25 or 30 year loan opposed to a Principal and interest loan are you actualy just paying out more money to the banks or are you actually delaying
the time of the loan?
If you are paying more to the banks then that interest must be tax deductible?
And how much extra would you be paying on a 200,000 loan for example?Probably a common sense question but having trouble grasping this concept.
[blush2]
Thanks DomDom,
An example
Loan: $300k
Term: 30 years
Interest
Rate: 7%Principal & Interest
P&I: 1995.91Principal repayment component starts at $245.91 in the first month and increases by $1.50 per month.
Principal remaining (after 5 years): $282,394.59Interest Only
I/O payment: $1750
Principal remaining (after 5 years): $300,000You are paying more for P&I, which is reflected in the reduced principal outstanding at the end of 5 years.
Usually I/O loand revert back to P&I after a certain period of time. By paying I/O, you pay out less, which in theory can be used to fund/save for other investments
All interest component (for an investment) is tax deductible, which is no different for both scenarios
Hope this helps.
James
Very simply, you are doing both.
You are paying extra interest to the bank (and ultimately paying more altogether as the principle needs to be repaid some day), and you are also delaying the repayment of the loan.
You are only paying more as far as your monthly repayment goes for a P & I loan. If you looked at the total loan costs (IO vs P&I) you would find the IO amount to be the highest. It is sort of common sense, but alot of people do struggle with this.
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