What exactly is an interest only home loan?

Question

I know the answer is in the question but I want more information about what I might be doing. I own a home (conventional loan) and I am getting married soon. My fiancee and I want to buy a new home together so we applied. They said because I just changed careers they can do an interest only loan. How does it work? what are the benefits? what are the downfalls? Any information will help. Thanks.

Answer 1

Not sure why you're only being offered interest-only. I'd shop around for other mortgage brokers, just to be sure.

An interest-only loan is where you (for a period of time) make only interest payments. You make no payments against principal. So, unless there is appreciation of the property, you do not build equity.

This is a pro for a few reasons. First, with interest being tax deductible, basically your whole house payment (not including insurance/taxes going into escrow) is tax deductible.

And the payment is lower.

That's why people take them (and maybe why you're only being offered it). The monthly payment is lower.

It's a bad thing because, at some point, you have to pay the principal. If you're lucky, it won't be until you sell. And if the house has appreciated, you'll have the money to pay off 100% of the principal. If the house has depreciated (or has appreciated very little such that your other costs like agent commission are more than the appreciation), you have to find the extra money. A little risky. What'd happen if you needed to sell your house during a housing bust? If you HAD to sell your house, you'd have to find the money to pay off the principal.

Of course, this is always true. However, when you built equity, you lower the risk with every payment.

You can simulate by saving the principal payment, each month, in your own bank account or investment.

If you are well disciplined, an interest-only loan needn't be a bad thing. However, many of these loans carry bad terms. For example, some loans have a bubble payment in 5 or 10 years. That means that you need to pay 100% of the interest in 5 years, if you've sold or not. You'll then need to refi and (a) interests rates may have gone up or (b) you may be turned down depending on your situation.

But, if you have a fair loan and are disciplined to save the principal payments in your own bank account/investment, they might be fine for you.

This said, an amortized loan should be available to you, even though you switched careers. It just might be at a higher rate.

Answer 2

if you only pay the interest the balance will not go down. With the housing market like it is some houses are going down in value so in 5 years from now you could owe more than your new house is worth. Normally after 10 years you are required to start making full payments which will be larger because you will only have 20 years to pay off a 30 year mortgage. when you are doing the interest only you are basically renting the house; all of the money you are paying in goes to the bank and you get no benefit out of it. And it is not as good as renting because you can't just call the landlord and have them make repairs. These loans are usually starting out with a teaser rate that is very low and in a couple a years you are at a high rate and because you have paid only interest you do not have any equity you can't refinance and are stuck with this loan.
My advise is to check with more lending institutions then if you ar turned down stay in your house for a little longer til you do qualify for a regular mortgage or if you really need the new house find out exactly how high the rate on this loan could possibly go and if you are willing to take that chance take the loan and make as large of a payment each month as you possibly can so you can refinance if you need to in a few years.

Answer 3

An interest only home loan is exactly as it states: "Interest only". Most home loans are based on a 30 year amortization schedule. With each payment made, a portion will go towards principal (the amount of the mortgage loan) and the larger portion usually goes towards interest. AN interest only loan means that if you borrower 100,000 and your calculated payments are $750. per month, you can pay this $750. per month for a long length of time and your balance from your original loan amount never decreases. While a standard loan will decrease each month by the amount of payment towards your principal, the interest only loan does not offer any payment towards the original loan amount.

Answer 4

You pay only the interest without ever touching the principal balance. It's good if you are first starting out and can't qualify for a regular loan. It beats renting and improves your credit score if you pay on time. The drawback of course is that you never touch the principal balance. You should be able to get a normal loan after you've been at your job for a year or so.

Answer 5

interest only home loan means you only pay the interest on the loan for X time period... of course, you knew that. basically, you sign for the loan and start paying interest on it. it is written in the contract how long it is... whether it is 2 years or 5 years. at that point, you begin paying the principle.

the problem with it is that you are only paying interest and so your principle never goes down. credit card companies and mortgage companies will love you for life as they are taking you money forever without any real end in sight. at the end of the interest only period, your interest rate may change as well...

probably the only good thing about interest only is if you plan on flipping the house. since you don't spend any money on principle, you can buy, renovate, and then flip for profit. but that isn't the case for you.

dunno why they say interest only for you. if either of you have a good fico score, can maybe apply for the loan separately. of course that is its only problems.

Answer 6

I can't imagine why your career change would mandate an interest-only loan. It should have zero bearing, unless you recently switched to being self-employed or commission-only, in which case they might be doing a stated-income or no doc type of loan.

Benefits: lower minimum payments, flexibility to pay down principal as you choose (assuming no pre-pay penalty, though even with one, you can usually pay 20% down on principal per year and avoid the penalty).

Downfalls: no principal reduction, unless you keep paying it down. Usually, slightly higher rate (.25-.50% higher).

Answer 7

Its the amunt equivalent to truly worth of your place much less money owed. In different words for a at present offered living house - your purchase value minus incredibly mortgage quantity. generally you're asked to place 10-15% down charge and that's the fairness you have in the living house. Now secondary creditors supply you loans in keeping with this quantity prevalent as living house fairness mortgage. It makes greater sense in case you were procuring various years on the living house and the living house value has appriased then you fairly can use the living house fairness to get the mortgage. generally the interest paid on living house fairness is tax deductible and hence its greater useful.

Answer 8

Loans that have the OPTION to pay interest only, and the rate is fixed, can be great loans. They will potentially help you afford more house.
http://www.choicefinance.net/interest-only-loans.htm
Be careful of the interest only loans where the interest rate is monthly and based off the MTA or COFI.
http://www.choicefinance.net/mta-option-arm.htm

Answer 9

Yikes! I fear "Interest Only"!

Pros: Lower monthly payment (conceivably)
Cons: You are not paying down on the Principal amount (aka the purchase price)

Answer 10

RENT