I saw an ad for a $300k loan at $875/mo. How can this be possible?

Question

This seems too good to be true. I don't know much about mortages but this doesn't seem right to me. Where do they squeeze you?

Answer 1

I pulled up the same loan which is offered by Quicken Loans. It's a measly 3.5% which is unbelievable but it's a gimmick. Here's something from their website:

" Why is the minimum payment so low?

* The minimum payment is the lowest of the four payment choices available. When you choose to pay the minimum payment, you're paying less than the full interest that is due for that month. By deferring your interest, the unpaid interest is added each month to your outstanding principal loan balance.
* If you defer payment of interest, your outstanding loan amount could exceed the value of your home. This may affect your ability to refinance your loan or sell your home since you will owe more than what your home is worth. A higher loan amount may also result in larger payments down the road."

So basically you still have a loan at 7% interest, only they're letting you pay less than the interest due and adding the difference back to the principal. So if you only pay the minimum your loan balance will climb. Eventually it will convert to an interest only loan that fluctuates with the prime rate and which will require you to pay the entire interest.

Answer 2

Please read the fine print. Usually these are interest only for the first 3-5 years. The first 6 months there is a even lower rate which comes to about $875 a month. Then you pay only interest for the remainder of the 3-5 years. This means after 5 years, you still owe $300K on the loan. After this, you are charged the current interest rates which will change every 6 months. If it seems too good to be true, it usually is.

Answer 3

When these mortgage products first appeared 2-3 years ago, property prices were booming. These loans are called interest deferred loans where you pay a fraction of the interest while the rest of the interest is added to the principal. However, after a couple of years, the deferred interest period ends and the nominal interest rate applies. However, because these loans are also adjustable rate mortgages, the interest rate will change after a set period.

Stay away from such a mortgage because these mortgages were used to induce people into buying way more house than they can afford.

Answer 4

I agree with some of the ideas, but it may also be a 50 year loan! 50 years! People are not qualifying for 30 year loans because of bad credit, so to lower the payment, the lenders spread it over 50 years. Or so people who have good credit, but want too much house for the money they make, so this is how a reduced payment can be offered. Who would really want to pay on a house for 50 years? 30 years is bad enough!

Answer 5

You only pay the interest. It is what banks have set up since the interest rate is so low and people now adays are living in thier homes till they are paid off so they only charge interest and you would have to pay on it forever or sell it..

Answer 6

A perfect credit score