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interest only loan/mortgage

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  • Avatar Brains428 
    Participant
    Status: Physician
    Posts: 392
    Joined: 11/09/2017

    Is there ever any scenario where one would choose to do the interest only option for a mortgage? Is getting a physician type mortgage essentially an equivalent of this? I’m assuming that because interest rates are low currently, that this would be a bad idea altogether.

    I’m only asking about this because it came up in a chooseFI podcast on AirBnb rentals (basically this is how someone could get financing from a private investor, but was just entering the space). I then searched it on the bogleheads forum and came across an interesting thread from January 2008 about using one (not sure if its okay to cross post from another forum, but I’ll post a link if allowed).

    Would this option be good for a higher earning physician recently out of training and trying to catch up on investments? Too much risk? Or… as with a lot of answers, it depends?

     

    #226810 Reply
    Avatar pierre 
    Participant
    Status: Resident
    Posts: 179
    Joined: 02/01/2016

    I was sold an interest only loan around 2008. Refinanced after medical school to a 15 year fixed. The main selling point was a lower monthly payment.

    I consider it one of my biggest financial mistakes.

    No problem posting a link to bogleheads.

    #226821 Reply
    Liked by Craigy
    CordMcNally CordMcNally 
    Participant
    Status: Physician
    Posts: 2806
    Joined: 01/03/2017
    Would this option be good for a higher earning physician recently out of training and trying to catch up on investments? Too much risk? Or… as with a lot of answers, it depends?

    Click to expand…

    If you’re a higher earning physician then you won’t have any issue catching up on investments. I assume no student loan’s? Luckily, this place is more relaxed than Bogleheads. The moderation over there has always been a big turn off for me.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #226826 Reply
    Liked by Peds
    Avatar ajm184 
    Participant
    Status: Other Professional
    Posts: 635
    Joined: 07/14/2017

    An Interest Only loan is an option because there is a market for it.  As the name implies, the idea is that a person is only paying interest and no principle is being paid down.  IMO an interest only loan as a way to ‘catch up on investing’ is not a good idea.  Given you are recently out of training and likely you have significant financial leverage (via student loans) already.  IMO it is time to translate the intellectual capital earned into cash flow to quickly reduce financial leverage.

     

    #226828 Reply
    Avatar Brains428 
    Participant
    Status: Physician
    Posts: 392
    Joined: 11/09/2017

    https://www.bogleheads.org/forum/viewtopic.php?t=11856

    Here is a link to that post from before the real estate crisis.

     

    For clarity, I have no intention of purchasing a house until student loans are paid off and I can qualify for a conventional mortgage  or potentially pay in cash (18 months to 4 years depending on which I choose). This is mostly a thought exercise for a Monday.

    #226844 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3030
    Joined: 09/18/2018

    What your suggesting is basically 100% leverage (on the loan amount) for investment purposes, to “catch up”.

    Yes, your returns will be greatly magnified, either up or down. If you plan on paying off the “interest only loan” over some period of time, yes that gives you a much lower cashflow requirement. It is higher risk but will either “catch up” or put you “farther behind”. These loans would normally be variable so you would have interest rate risk uncompensated.

    #226869 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4525
    Joined: 05/13/2011

    Is there ever any scenario where one would choose to do the interest only option for a mortgage? Is getting a physician type mortgage essentially an equivalent of this? I’m assuming that because interest rates are low currently, that this would be a bad idea altogether.

    I’m only asking about this because it came up in a chooseFI podcast on AirBnb rentals (basically this is how someone could get financing from a private investor, but was just entering the space). I then searched it on the bogleheads forum and came across an interesting thread from January 2008 about using one (not sure if its okay to cross post from another forum, but I’ll post a link if allowed).

    Would this option be good for a higher earning physician recently out of training and trying to catch up on investments? Too much risk? Or… as with a lot of answers, it depends?

     

    Click to expand…

    Wow. Are those back now?

    I’ve seen this movie before, I know how it ends. If you don’t, here’s where you can find the movie:

    https://www.youtube.com/watch?v=EqjrWefjkUk

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #226877 Reply
    Avatar Infinity 
    Participant
    Status: Physician
    Posts: 91
    Joined: 05/25/2019

    Loan/debt can be good or bad depending on why are you taking it.  If you want to buy house that you can’t afford or use money for luxury life style, then it is not a wise decision.  If you are disciplined person and you know that your income is secure and can support the loan, then I think it may not be bad.

    Seven years ago, I took 1M loan to purchase my professional building.  It was no down (the bank appraised at 1.3M so they allowed me to pay nothing down and considered it as 80/20 loan), 10 years term, with 30 years amortization and 4.5% interests.  I wanted to pay as less monthly payment as possible.  I put 1M to s&p 500 index funds.

    Today, a developer offers 2.5M for my building and the s&p goes up to 2.5M as well.  I has been paying monthly mortgage, taxes, insurance, and utilities closer to what I would have paid if I lease the office. 3M gain in 7 years from 1M investment is not bad, considering I have not done much work.

    Please read what Tim said above.  Leverage is a double edged sword, it can hurt you badly if you are in bad luck situation or don’t know what you are doing.

    #227052 Reply
    Liked by Brains428

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