Mortgage that alternates interest rate every year?

Mortgage that alternates interest rate every year?
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#1

Hypothetical question - could a lender offer a mortgage product that alternates it’s interest rate every year? For example year 1 would be 8% interest rate, year 2 would be 0%, year 3 back to 8%, year 4 is 0%, etc.

With the new higher standard deduction and the cap on SALT, it could be worth many thousands of dollars a year to have a product like this for your mortgage. Claim the standard deduction in years when the interest rate is 0% and use itemized deductions in the years when the rate is 8%.

#2

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#3

The only way I see this would work, is if the interest is accrued at 4% each year ( following your example ), but every other year only principal payments are made, and the interest just accrues but isn’t paid. This resolves the issue of the loan being paid off or refinanced in the 8% year vs. the 0% year. I would also expect a loan like this to be at least 0.5% more expensive at origination, maybe more as it wouldn’t be a conforming loan that could be sold.

#4

Interesting idea. Such a mortgage would save me around \$2500 every 2 years on my taxes.

#5

The gubmint would come out with alternating standard deduction to combat this

#6

I don’t understand why paying/refinancing the loan under an alternating year interest rate loan would be any different than paying off a loan with a fixed interest rate. When you payoff a loan you pay the remaining balance. The remaining balance is whatever your balance was at the last payment you made plus the accrued interest between that payment and the payoff date. It’s true that the accrued interest would be different depending on whether it was the 0% year or 8% year but that doesn’t really matter. As long as the loan was structured such that the higher interest rate year came before the lower interest rate year the bank never has any potential for loss.

Thinking about this for a large majority of people who basically have these three types of deductions:
1)SALT - limited to \$10k
2)mortgage interest
3)charitable donations

Assume for a moment that anyone pursuing a loan like this has \$10k in SALT one way or another. I think the maximum benefit this type of loan could offer is the ability to deduct the difference between the standard deduction ~\$24k minus \$10k SALT, so a \$14k additional deduction every other year. If you’re in the 35% tax bracket that’s \$4900 every other year. Not too shabby.

#7

At which point you receive the same benefit as the standard deduction?

#8

You arent going to get away with making payments labeled as “principle” at the same time interest is also accruing. The interest is still being added to the loan balance, and thus being “paid”.

What you’d need is a mortgage with an annual payment schedule, where one large payment is due once/year, instead of smaller payments due once/month. With a due date of Dec 31, you could shift a full year’s interest expense to the next/previous year. However, good luck finding a lender to do this, and if reviewed interest will likely be imputed year-to-year anyways.

#9

No.

For simplicity’s sake let’s assume you have \$10k and \$14k mortgage interest every year, and no other deductions. If you itemize every year you have \$24k worth of itemized deductions each year, for a total of \$48k worth of deductions every two years. If you take the \$24k standard deduction every year, you have a total of \$48k worth of deductions every two years.

If instead you pay \$28k of interest one year, and \$0 worth of interest the following year - in year 1 you itemize \$10k SALT + \$28k interest for a total of \$38k deductions, and in year 2 you take the \$24k standard deduction you now have a total of \$62k of deductions every two year.

\$62k is \$14k more deductions than you’d get by paying the same amount of interest every year.