Does anyone know what the "catch" is with an interest-only mortgage loan?

Answer 1

Most interest only loans have a starting period, sometimes between five or ten years, where you only pay the interest every month as your payment. Because you are only paying the interest due, and nothing towards the principal, you do not gain equity through your payments.

Once the interest only period expires, your payments recast to whatever the normal payment of principal & interest would. This is sometimes higher than a regular 30 year fixed payment, because you are spreading the actual term of the payments on principal across a shorter time span.

The only way you can gain equity with a loan of this type, during your interest only period, is if your property value appreciates over time with the surrounding market, or you perform home improvement upgrades.

Interest only loans are good programs, for specific purposes, but should not be a way to purchase more home than you could otherwise afford. If your property value ever decreased because of your local market conditions, you could easily end up oweing more than the property is worth.

You should consult with a professional mortgage planner to analyze your situation and make an informed decision on whether an Interest Only loan meets your goals and needs.

Answer 2

The "catch" you're asking about happens when the interest only portion ends.

Many people confuse interest only with "adjustable". They're not the same. A popular loan is a 30-year-fixed interest-only loan. You're allowed (not required!) to pay interest-only for the first 5,10, or 15 years. At the end of that, whatever balance remains is simply amortized at the _same_ rate over the remaining term. So a 10/20 means you have 10 yrs of interest only followed by a 20-yr-fixed at the same rate.

That means the payment will go up, however, you're likely to be making more money in 10 year, so that may be acceptable to you.

See http://www.rogerv.com/InterestOnly_a.html for more information on this.

Answer 3

1) usually higher rate. For most subprimes, it's generally a quarter of a percent higher for the same client in the same situation to get the same loan interest only as principal and interest. This is because it's a riskier loan, as you're not obligated to pay principal the first few years. A paper is usually less of a difference.

2) They usually start amortizing at the end of the fixed period, and they're supposed to amortize over the remainder of the thirty year period of the original loan. This can cause the payment to suddenly rise by fifty percent. If your income hasn't gone up, you can be in a heap of trouble. You can be forced to refinance into another interest only, and if you can't refinance, to sell or be foreclosed upon.

It's okay, so long as you know what you're getting into, but since what the mortgage is really costing you is the interest rate, if you can afford the amortized payments, you're better off making them.

Answer 4

Now for what you want to read:

Interest only mortgage loan just pays for the interest being charged on monthly payment. A standard 30 year fix in a Principal and Interest Loan or P&I. If you add taxes and insurance (aka impounds) to your payment than its refered to PITI or Principal Interest Tax and Insurance. So if you pay interest only than you are only paying off the interest portion of the loan and not the Principal.

False Statement: Pay interest and your home never gains equity? Equity is gained on land value. If your home is worth $10,000 first year and 2nd year worth $20,000 than you gained $10, 000 in equity. So please dont believe if you pay interest only that your property never gains equity. Not true acutally would scare about 1 million american homeowners if this should happen.

Advise: If you use interest only product you need short term:
2 or 3 year arm good for 100% financing
5 year arm good for short term housing or you know you will refinance is less than 5 years to pull out the equity and use it for some other type of financing.
7-10 year arm for long term but its better to get a hybrid 30 year interest only loan which for the first 10 years its interest only and 11-30 year its turns into 30 year fix without any rate change. Product rocks!

So is there a catch! No not unless you werent educated correctly on this product. Just remember that whatever term you choose than after your term is up than you start running with the market.

False statement that you would never pay off the principal. That wrong as well. You would start paying of the prinicpal in about 3-4 years but its not as much as a standard full PITI payment.

Answer 5

Usually they are fixed for up to two years and then they become variable rate mortgages after that. If your having trouble making the payments in the third year and you go refinance it for a fixed rate, you could be charged up to 3% penalty. Your principal balance will never go down if you are paying intrest only but the intrest only period usuallly expires at somepoint and you will have to make intrest and principal payments anyway. Depending on the loan amount and your plans with the home an intrest only loan would benifit someone who is going to sell the home in a very short time. You can usually pay 0.5% more in intrest to avoid paying the 3% penalty. Always remember that the longer loan terms that you sign up for the greater the total cost of the home will be. In a thirty year loan you could be paying for you home up to three times but your only getting one house. Although the terms of an intrest only loan are set for a thirty year period your term could become longer because of the period of time that you are not paying down the principal. I cannot imagine too many people actually keeping a intrest only loan for the entire term. I truly believe that it is a financial product that allows investors to hold onto a home at a lower payment long enough to make improvements to a home or wait for a sellers market to get the best market price when they sell it. However There are some tax advantages to this situation as well. Consult with your CPA for further information.

Answer 6

An interest-only loan is a loan in which for a set term the borrower pays only the interest on the Principle balance; the principle balance will remain unchanged. At the end of the interest only term the borrower may renew the interest-only mortgage, payoff the principle balance, or (with some lenders) convert the loan to a principal and interest payment (or Amortized)loan at his/her option.

Answer 7

If you are expecting an increase in income, this may also be a way to purchase a home that you may not be able to afford otherwise. It is also good for someone with a variable income. Just because the loan says interest only does not mean that you cannot pay over the minimum amount. Sometimes I help my customers in these types of loans with amortization schedules outlining different payment scenarios. That way, they have the flexibility of a smaller minimum payment with the option of applying principal payments at their discretion. If properly managed the interest only loan can be a force for good! : )

Answer 8

No catch - just means you pay interest only for a certain term then convert to a principal and interest loan at the going market rate. Watch out for negative amortization

Answer 9

The biggest "catch" is that housing prices could go down and your loan could get upside-down. That is, the value of the property could become less than the amount of the loan. In which case you could not pay back the loan by selling the property.

Answer 10

You're only paying interest, you're not actually paying anything on the mortgage. You could make payments for 30 years and you'd still owe your original amount.