What is the advantage of an interest only mortgage loan?

Answer 1

Okay, let's say you wanted to buy a car for $30,000, and could do so with an 8% interest loan, paying only interest.

That would make your payments about $200 per month. Good deal, yes?

But what will that car be worth in five years? We know that you'll still owe $30,000. Still a good deal?

How about your credit cards? Is paying interest only a good idea for those?

So what makes a house any different?

Well, it will PROBABLY go up in value, but not necessarily. Or maybe the plan to pay just the interest is a temporary plan, and you intend to start paying the principal after a few years of getting the car, credit cards, and school loans paid.

Maybe it's a good idea if you plan to pay down other debt that's at a higher rate, but if the only reason is to get you into a house you really can't afford, don't do it.

Answer 2

An interest only mortgage is usually a 30 year fixed mortgage, with interest only for the first 10 years of the loan, then the remaining 20 years payments are prinicpal and interest. A good loan advisor will tell you this is a good product because it allows you to have a lower payment for the first 10 years of the mortgage. The average person lives in their home for only 5-7 years, and even still will most likely refinance within that time, so the interest only gives you a lower payment which is convenient. it is also used to make the payments more affordable, with the intention that once the interest only period is up you will be making more money, or would have refinanced by then. You can always make more payments toward principal if you want, and the interest only payment, is 100% tax deductible. If you have any more questions feel free to email me at [e-mail]
Good Luck!

Answer 3

The advantage is simply that your required monthly payment is significantly lower than a fully amortized loan. Example: on a $100,000 loan at 6%, the 30-yr amortized payment is $600, versus an interest only payment of $500. I've used this type of loan on investment properties - but I wouldn't use one on my primary residence. The rationale for me is that I'm invested in a property to take the profit out (now or later), so why not take some of it now if I can create a positive cash flow?

This type of loan is also great for some people who know for sure their income is going to increase significantly in a few years. Unfortunately, there's been a lot of abuse in promoting the use of interest-only loans, and some unscrupulous mortgage brokers have placed some people into these loans that definitely should not have been.

Answer 4

Some people find it to be more affordable, but it's WAY riskier for the consumer... I'd avoid it and put down as much of a down payment as you can afford (as well as rolling PMI into the mortgage itself instead of paying it every month). I've seen plenty of people lose their homes to foreclosure who thought that interest-only loans were their shining star of a chance.