Because you're only paying the interest. There is no amortization initially, so it is irrelevant how long it is spread over. You're always paying only that months interest, and if the rate is the same, so will be the payments.
Now nobody does interest only for the full term of the loan. Every single one of these will start to amortize at some point, at which point the payments will be higher for shorter amortization terms, and lower for longer ones.
2006-08-07 03:57:46
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answer #1
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answered by Searchlight Crusade 5
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Say you borrowed $100 and signed up to pay interest only at 10%. On the first year you pay $10 representing interest only. Since the principal was not reduced by the payment, it remains the same amount, $100. On the second year you have the same loan and you pay another $10 representing interest only. Again the principal remains the same so on the third year you pay another $10 interest. This goes on forever because you are not reducing the principal. So you make the same payment whether, 1, 2 35, 30, 50, or 100 years. You are forever in debt.
2006-08-07 10:12:36
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answer #2
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answered by cherox 3
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Are you kidding? you would make the same payment if it were for 100 years because you are only paying the interest not the principal. The length of an interest only loan is set as a limitation of time the lender is going to let you borrow the money. You must refinance or pay off the principal before the end of this period. Now I'm not saying that interest only loans are not good, but you will want to refinance as your property climbs in value, so that you can draw out the equity in cash to invest in an interest making investment. The interest you make on this investment plus the porthion of interest you are allowed to deduct from your taxes makes the loan interest you are paying less than zero%, in most cases you will have a positive cash flow on your investment. Letting equity sit in your house without investing it will not make you any money. You might as well stuff your money under your matress if you don't invest equity wisely.
2006-08-07 10:29:17
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answer #3
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answered by bigmama 2
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With an interest-only loan, you pay interest on the loan, but you end up still owing the same amount at the end. So let's say I say that I will lend you £100,000 at 5% per year. The payments you need to make in the first year are 5% of £100,000 = £5,000, but at the end of the year you still owe me the original £100,000. In the second (and every other) year, you also pay me £5,000, and still owe me £100,000.
With a Repayment loan, you pay the interest PLUS some of the £100,000, so if you take out a 25 year loan the proportion of the original amount you pay back each year has to be higher than if you take out the loan for 35 years.
2006-08-07 10:14:47
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answer #4
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answered by Graham I 6
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Because on an interest only mortgage, you are only paying the interest - not any of the capital. Hence, for a £100,000 mortgage charged at 6% - you pay £6000 that year (which equates to £500 per month). At the end of year 1, your outstanding balance is still £100,000 and you will be charged £6000 interest again. This example assumes interest is calculated annually - most mortgages have their interest calculated daily and hence the figures above will be slightly incorrect.
2006-08-07 18:00:49
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answer #5
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answered by nemesis 5
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Because you are only paying on the interest. The principle is part of the loan that needs to get paid off. You will need to make payments higher than the interest in order to eventually pay off your loan.
2006-08-07 10:10:15
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answer #6
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answered by mixemup 6
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Yep, if your interest is at say 5%, it's always 5% of your mortgage - because the amount borrowed is never paid off.
2006-08-07 10:11:20
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answer #7
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answered by jay_w_uk 2
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because the capitol never goes down so no matter how long the loan the interest is always the same.
2006-08-07 10:09:13
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answer #8
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answered by Anonymous
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