2006-12-11 11:17:10 · 5 answers · asked by MaJoy 1 in Business & Finance ➔ Renting & Real Estate
With this type mortgage, you pay only the interest each month, and the principle on the loan remains the same. This can be a very attractive loan for the buyer, as the payments are substantially lower.
In a time of rising property values, this loan has minimal risk. However, when properties in some areas are 20% lower now than they were a year ago, there is some risk for the borrower here.
The mortgate contract may have some privision that specifies that, if the value of the property decreases, the buyer (borrower) must pay more each month. This is based in a formula that is specified in the loan documents.
Why would a lender make a loan that, since interest only is being paid, would apparently never be paid off? In the USA, the life of the average mortgage is 7-8 years. So, after that amount of time, an interest-only loan would be paid off when the house is sold. In a time of rising prices, everyone wins.
The only down side is when real estate values decline.
2006-12-11 11:27:23 · answer #1 · answered by David545 5 · 0⤊ 0⤋
Interest Only or I/O is exactly that. You're paying the Interest ONLY. It's good because you have a low payment, but if your objective is to eventually have your house paid off, then you want to pay Principal & Interest (P/I). Some lenders raise your rate if you go this route, so be careful & make sure you're with a broker/banker/agent you can trust.
If you're in California & are looking to refinance, shoot me an email with your contact info & I'll help you. I am a Banker & a Direct Lender located in Oakland
2006-12-11 11:23:59 · answer #2 · answered by Solstice 3 · 1⤊ 0⤋
I personally think these are a really bad idea. You are not paying anything to the actual cost of the house. Where you can really get stuck is when you try to sell the house, or even re-finance and the value of the house has not gone up, you have no equity, thus you have nothing to show for all of the payments you made.
2006-12-11 11:31:21 · answer #3 · answered by Brian V 2 · 0⤊ 0⤋
You are paying Nothing towards your house per say..only the interest that is being charged..bad idea
2006-12-11 11:24:33 · answer #4 · answered by mountain lady 2 · 0⤊ 0⤋
when u buy a house the interest is the rate how much u will pay for the house . it also depends how long u take a mortage out and how much
2006-12-11 17:10:27 · answer #5 · answered by crystal w 3 · 0⤊ 0⤋