Interest Only Mortgage?

Question

Can someone break it down for me?? If I get a home that is 250K and I only pay the interest, will I build equity in the home?? Hope I dont sound stupid asking this!!
Thanks

More info on my scenerio. Will be making considerable more money in the next year and a half, wont be staying in the home as my residence for more than 3 years. But would like to keep it as a rental possibly?? I am confident in the market in my area. I do not live in CA . The market here has steadily risen over the past 3 years...

Answer 1

You will build equity if and only if the value of the house increases, usually with inflation.

Eventually you will have to refinance the mortgage. Or you can voluntarily pay off principal, or bits of it.

The smartest use of interest only mortgages are with rental property, to keep the tax deduction as high as possible, and to retain capital for further investment elsewhere.

Answer 2

Your first concern is market value of the property. If you overpay for the property no matter what loan you get it will be a bad one. Make sure you are paying below or at market value (right now you should be paying below market value). Next is to decide how long you are planning to stay in your home for. If you plan on staying in it forever you should get a 30yr mortgage. If you plan on staying for a short period an interest only is a good loan. The interest is lower than a 30 yr. You would be surprised on how much prinicipal you really paydown in a 5 year period probably around $10k-15k (on a 30yr). so no matter what if you need to sell and your value has not increased by that much over a 5 year period you are in trouble. To answer your question you will be building equity if your value increases. Equity is Market Value - Mortgage Amount. My biggest piece of advice is to make sure you don't overpay for your property ask to see comps in your area to justify your price.

Answer 3

For the scenario you are describing an interest only loan would not be a bad idea. When you do a new loan your only paying interest in the beginning regardless if it is IO or fully amortized (ok, maybe $5-$40 goes to principal.

If you are not planning to be in the home more than 3 years or you will convert it to rental than an IO loan is not a bad idea for you. I have several income properties and all are IO to maximize the write off and counter the income from the rental on my taxes.

You will build equity one of 2 ways... making principal payments against your note or by the value of the property increasing over and above what you currently owe on it.

Kevin 866-562-6838 x 106
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Answer 4

If you’re only paying interest, then the only equity you build is whatever the home appreciates, if it does. If your mortgage allows you to pay extra on it, you might be able to build up additional equity by paying more each month.

And be aware that just because a market has been going up for a few years doesn’t mean that will continue – markets can turn very quickly, and not just in California.

Good luck.

Answer 5

I agree with most above, but want to add, it's very common for self employed people to get this type of loan. It allows you to have a minimum payment at a lower interest and pay towards pricipal as you can. For instance on a regular note your payment may be 1850.00 with 1750.00 or more going to interest in the beginning anyway. with the interest only your payment is 1700. and it goes all to interest first, but if you go ahead and pay the 1850 the rest goes to principal and it can work the same with the lower interest. Depending on your circumstances it may be worth it. You can always refinance in a few years if it doesn't work for you and you haven't lost anything more than renting which someone else recommended and I don't. I think renting is a waste. You don't even have the chance of the market growing to help you. I know several people on them that would not go any other way.

Answer 6

If you pay interest only, you are not paying the loan off just the interest on the loan. This will not give you equity.

Home equity is the difference between the fair market value and current indebtedness, also referred to as the owner's interest. The value an owner has in real estate over and above the obligation against the property.

Answer 7

No you will build no equity in the home. At this point getting an interest only morgage is a very bad, idea especially in some real estate markets where it is becoming difficult to sell a home. You should only get an interest only morgage if you don't mind renting your home from the bank, with the responsibility to continue to pay that rental until you are able to find someone else to buy.

Answer 8

Hope this helps,
You will build equity if and only if the value of the house increases, usually with inflation.
Eventually you will have to refinance the mortgage. Or you can voluntarily pay off principal, or bits of it.
The smartest use of interest only mortgages are with rental property, to keep the tax deduction as high as possible, and to retain capital for further investment elsewhere.

Answer 9

An interest only mortgage is a BAD idea, unless you plan on living forever! It's basically saying that you'll spend the next 30 (or however many years) paying on something that you'll still owe the same amount that you borrowed. It's usually used by people who have trouble making larger payments, or don't really check into it. If you need a place badly, and can't afford larger payments now but can in the future...it would be an ok deal because then you can pay the interest and also make a payment on the principle also, but if you'll never be in that kind of financial shape it's not.

Answer 10

If you are only paying interest on the mortgage, than no, you will not be building equity in the home. Unless somehow the area you are buying in goes up in market value, which is not something to count on. If it goes down, and you try to sell, you will owe more than your house is worth...