Interest-Only Mortgage for College Savings
If you have young children you know the advantages of starting
a college fund early, so the money in the fund has as many years
of compound interest as possible to help it grow.
If money is tight an interest-only home loan may be the answer.
With an interest-only mortgage you pay only the interest on the
borrowed principal of the loan and make no payments on the principal
itself. Such an arrangement can reduce your monthly mortgage payments
by $100 to $150 or even more, depending on the amount of the mortgage.
Assuming that you are able to get a 15-year interest only loan,
which is becoming more and more common all the time, you could
conceivably put aside the extra $150 per month that you would
be saving on your monthly mortgage payments into an interest-bearing
account that would be used for your child’s future educational
needs. At $150 per month you would put aside $1,800 per year.
Even at a modest rate of interest setting aside $150 per month
for 15 years could add up to a nice college nest egg.
During this 15-year period the borrower would not only be putting
aside as much as $150 per month toward his or her child’s
future education, but the borrower would be realizing the income
tax benefits of all the interest being paid on the loan, which
would, in effect, be putting even more cash into the homeowner’s
pockets.
At the end of 15 years the borrower would not have made any payments
on the principal of the mortgage and so would not have accumulated
any equity in the property in that way. However, chances are good
that inflation would have caused an increase in the value of the
property over 15 years. In this way the borrower would still see
some equity cash value from the property.
With the end of the interest-only portion of the loan the borrower
would be forced to sell the property to make the payment of the
initial principal of the loan, or the borrower would have to make
that balloon payment from other sources of funds, or the borrower
would have to refinance the loan.
As long as the borrower understands how the interest-only loan
works, and as long as the borrower has the commitment to invest
the money that would otherwise have been used to pay down the
principal of the loan, an interest-only loan can be a marvelous
investment tool for a child’s future education.
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