The simple answer is a lack of knowledge and understanding.  If you look at the whole picture logically, there is no reason to be afraid of deferred interest. There is no better mortgage than the option ARM as far as cash flow goes.

Although there often is deferred interest, it is actually a good thing. If clients will refinance the mortgage every five years to pull out cash to invest, why would they want to have an amortizing loan? What's the point in paying down a loan only to take back out the principal and start paying interest all over again?

• If you should re-finance, (the average person re-finances every 3 – 5 years to take advantage of appreciation) your interest rate was more like 90% and no matter what interest rate you refinance at, you start the process all over again.
• If something happens- loss of job, sickness, etc…, even though you might have equity built up in the house, banks don’t want to lend you money if you can’t show a way to pay it back.  (Isn’t it better to be in control of your own money?).
• If disaster strikes (take Katrina for example) and you have alot of equity trapped in the house, the bank doesn’t care when or if your insurance pays you.

They already have your money. Banks don’t put their money in a vault and let it sit there, yet that is exactly what they tell you to do.  “Pay down your mortgage.” Let your money sit trapped in the house doing nothing.  It’s much safer for the bank that way.  It is not safe for you at all. You’re paying the same amount of interest you would pay with a fixed, only you’re paying it on the back end instead of the front.

A person can take better advantage of the time-value of money when they make minimum required payments and invest the difference between it and their mortgage payment. Remember that the time-value of money says that a dollar today is worth more than a dollar tomorrow; you can employ that dollar today to create wealth. The wealthiest people understand that using other people's money is the best way to create wealth.

When people refinance and roll their closing costs into the loan or take money out for any purpose, their loan balance increases. This has the same effect as deferred interest. Many people refinance every three to five years to access the equity they have gained because of appreciation; this is similar to deferred interest but usually in larger amounts. I advise clients to manage their equity and cash flow by refinancing every three to five years with cash-flow-friendly mortgages and to invest the money to create wealth and prepare for retirement.

Other people's money is what leverage is all about. The most common way to take advantage of leverage is to invest in real estate through mortgages that help maximize cash flow. With an option ARM, interest accrues at the fully indexed rate. If clients choose to make the minimum required payment, however, they are making payments at a much lesser rate; the interest-only payment is calculated on the fully indexed rate. The amount of deferred interest in any given month is just the difference between the interest-only payment and the minimum required payment. For example, if the interest-only payment is $1,600 and the minimum required payment is $1,000, there is $600 in deferred interest. Most lenders add that amount directly to the loan balance.  The deferred interest takes on the characteristics of principal, thus creating negative amortization.  (The same thing happens when you refinance.  The closing costs are added to the loan balance.)

In his book Missed Fortune, Douglas R. Andrew says that we pay interest on everything. If we pay cash for a car, we still pay interest in the form of opportunity cost or forfeited return. This is because the money was used to buy a car rather than on an investment.

Contact Jackie Turco at 702-289-8303 (or click here to submit prequalification information) to find out what your options are today. There is absolutely no charge or obligation for a consultation.