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Is it common for a co-op's underlying mortgage to be an IO? How could this be good unless they are expecting lump sum cash payments that they will apply to the principle(sp??) upon receipt? Is it the tax deductibility aspect on the maintenance that would motivate the board to endorse this product? Isn't it better to have a goal towards paying down the debt & potentially unencumbering the building? What am I missing?
Yes, it's very common. There're different schools of thought on whether it's better to pay it off altogether or keep a nominal debt: http://cooperator.com/articles/158/1/A-Mortgage-Primer/Page1.html
Some co-ops carry no mortgage at all. 525 E 86th is the only one I can think of off-hand.
If you figure the amount of the mortgage that's your share, it's likely to be trivial.
E.g., my co-op's interest expense, at a nine-years-ago rate, is only $57,000, less than an employee.
Though paying interest-only (or -mostly) does cost more overall than a fully-amortizing loan, it keeps maintenance low, and also keeps tax deductibility consistent (the deductible % would decrease noticeably over the life of a fully-amortized mortgage, even while the cost remained stable until disappearing at payoff).
The subtle but important thing about this stability is it equalizes the burden on current shareholders versus longtime or future shareholders. Everyone's time horizon as an owner is going to be different, and everyone has different cash flow priorities. While you can argue that paying down the underlying mortgage is an investment that pays off in increased apartment/share values, that's really hard to quantify (except in terms of how it increases maintenance fees until payoff), and the gain in value is only captured if/when you sell your shares, so it's increased cost now vs theoretical paper gain to be realized at varying points in the future, which makes it a hard sell to a disparate group of shareholders.
Does it make sense though ?
Case by case needs to be evaluated ,
though with today's low rates , a refinancing is well worth it for 15-year instead of 30-year
Underlying mortgages are commercial loans, so hardly ever have 15- or 30-year terms. Most often 10 years.
One philosophy (we do this in ours) is to pay down at least a small amount of the mortgage. That way, come time to refinance, if interest rates have increased, we can take a smaller loan to offset the higher monthly charges and thus not all suffer a maintenance increase. It also gives us some flexibility in deciding whether to borrow more if interest rates are lower when refinancing.
I used to live in a building that did nothing but interest only loans forever. The long term financial impact seemed to be bad. The building had less financial maneuverability in tough times and ended up having to borrow even more at times to cover certain major expenses.
in my old coop we had a 10 yr loan with 30 yr amortization schedule. this way there was some principle payed off during that time period. the other thing to consider is that these loans are commercial and have a significant penalty to terminate early. by keeping them at 10 yr marks, the penalty is reduced or you can just wait it out and refi when the term is up.