Home Improvement

One of the drawbacks to an interest-only home mortgage loan is that the principal of the loan is not being reduced and that therefore no equity is being created by principal reduction. There is a very clever way around this problem which is especially good for those people who are specifically buying a property with the intent of selling it for a profit within a relatively short time-frame, say within five to 15 years.

Start by finding a home that needs improvements, preferably a home that is priced below market value because of the improvements that are necessary. These homes are often referred to as fixer-uppers.

By purchasing a fixer-upper at below market value you will already be leveraging your buying power. If you purchase the property using a fixed rate or even a variable rate 30-year mortgage with a 15 year interest-only payment option you will increase your purchasing leverage to an even greater degree.

With an interest-only loan you pay only the interest portion of your monthly mortgage payment and you are not required to make the monthly payment against principal. By setting aside the money that you would have spent on principal reduction each month and using that cash to make improvements on the home, you can conceivably add more equity value to the home than you could have by making standard principal-reduction mortgage payments each month.

Not only will you be building equity by fixing up the property with “free” money, but you will also still get 100 percent of the interest tax write off on the loan plus you will be benefiting from the normal inflation-created equity build-up in the property that you would have benefited from anyway if you were making standard fully-amortized loan payments.

This plan is not without its risks. If the housing market is soft at the time you plan to sell or if interest rates have risen substantially you may have trouble selling the property at all or you may have trouble getting the price you want. However, if the property was purchased at a discount to begin with based on the cost of fixing it up, the risk may then be viewed of as manageable.