2007-06-08 09:40:23 · 8 answers · asked by COblonde 3 in Business & Finance ➔ Renting & Real Estate
Interest-only loans are great if your house appreciates, because that will build up equity.
The danger with an interest-only loan is the reset. The worst case is a balloon where you must refinance or sell to pay the entire principal amount.
How dangerous an interest-only loan is depends on the duration of the fixed interest-rate interest only payments. After this point you have payments that are higher than even a traditional ARM, because the loan amount is the same and the remaining time on the loan is longer.
The big danger is an interest-only loan with a low down payment where you could end up even 3 or 4 years down the road having to sell and having to bring money to the settlement table because the commission and other costs exceed your equity.
2007-06-08 09:47:49 · answer #1 · answered by VATreasures 6 · 1⤊ 0⤋
The biggest downside to interest only loans is that many consumers never pay anymore than the required minimum interest only payment, thus never paying down the balance of their mortgage loan. Interest only loans are very good options when used properly and in the right situations. Right now though, borrowing on an interest only mortgage at a high loan to value (appraised value compared to loan amount) could be a little risky depending on where you live with some areas suffering from declining property values. Check the link out under sources for more information on interest only loans.
Ps. The loans you really want to be wary of are Pay Option ARM loans or anything with the possibility of negative amortization. Negative amortization means your balance will actually increase because you are not even covering enough of you payment to pay the interest portion of the payment.
2007-06-08 09:50:35 · answer #2 · answered by dzwreck 4 · 1⤊ 0⤋
Usually when you pay your monthly Mort bill, a % (probably about 25%) is all equity (the actual dollars you are spending on your house) and the other 75% is all interest. All interest is reversed and even a little higher. 10-90%.
The down side is if you wish to sell before 10 years, you will have NO equity built up.
But, if you are a saver, or if you wish to live in your house for more than 10 years (realistically) than there really is no downside. Also, after 10 years, your interest only mortgage switches to 100% payments for your house and depending on how expensive your house was your payments could jump. Mine will jump from $1100 for now to 2100 after 10 years. Also, make sure you are getting a fixed mortgage. You don't want a variable rate!!!
2007-06-08 09:51:23 · answer #3 · answered by Katie C 6 · 1⤊ 1⤋
The downside is that you retire NO principal on the loan. If the value of your home drops due to market conditions and you need to sell, you will have to cough up the entire amount you originally borrowed in order to sell the property.
2007-06-08 10:22:00 · answer #4 · answered by acermill 7 · 2⤊ 0⤋
If you are only paying interest you are paying nothing on the principle which is the original balance of the loan. Unless you're looking for a loan for quick buying and selling, not long term I would stay away from it. Basically you still owe that balance for the principle so in the long run you end up paying more.
2007-06-08 09:48:59 · answer #5 · answered by tylw85 4 · 0⤊ 1⤋
You pay a lot of money and have nothing to show for it. You don't pay any principal. Your only hope is that the value of the house goes up significantly in the first few years you own it.
2007-06-08 09:49:24 · answer #6 · answered by regerugged 7 · 1⤊ 0⤋
I believe that the downside is that you are never paying anything towards the interest of the loan. Makes it absolutely impossible to ever pay off the loan.
2007-06-08 09:44:46 · answer #7 · answered by rayb1214 7 · 0⤊ 4⤋
okay very short answer. you pay back way more than you borrowed.
2007-06-08 09:48:06 · answer #8 · answered by mousehth72 5 · 0⤊ 2⤋