Interest only loan? Good idea or not?

Question

Please read the entire question.

I just bought a house and I'm considering selling it in the next 2 or 3 years. I've been thinking about refinancing and getting an interest only loan to lower my payments until I sell. Does this make sense? If I got an interest only loan would that mean that I would have to pay the insurance and taxes separately? Would I be bound to the loan for the entire length of the loan period or could I sell before the period was up?

All answers welcome, but answers from those with experience in this area who can help me weigh the pros and cons would be appreciated.

Answer 1

My concern would be that if you obtain an interest only loan and are selling in a few years, and you olny make the minimum payment, you will have not reduced the principal balance at all. Therefore, you will have the same balance you have now, and unless you are in an area that is appreciating steadily, you will have potentially less of a profit. On the other hand, in the first 2 - 3 years of a mortgage, not much is paid to principal and mostly to interest anyway. You will also probably not be able to recoup your closing costs that you would incur in the refinance and this would cut into your equity that you may gain in the few years that you own the property. On most interest only loans, you can still escrow. Depending on the type of loan you qualify for, there may or may not be a prepayment penalty, and this should be disclosed to you initially. So if you are selling soon, just make sure of what the penalties would when you sell, if any. I hope this helps. If you have any other questions, or need additional information, just let me know. Have a great night !

Answer 2

This is a lousy loan if you are into your property for the long haul. I/O is good for people who are investors or who are owners who are figuring on turning over the property in a few years when it (hopefully) is worth more money. Unfortunately, in a down market, the property you buy could easily be worth less then what you bought it for. Since you are not paying down the principal, you could wind up with a loan that you can't even pay off if you sell because the house is not worth what you owe. The worst of these products is the I/O ARM, where the interest rate escalates after an initial period. This can be 1, 3, 5, 7 or even 10 years. Beware that there are some I/O products where the rate will change after only 6 months. The bottom line is that with an ARM you are likely to be slammed down the road with a big payment increase. With interest rates as low as they are, it is highly unlikely that the rate will go down - it is going to go up. If you can't afford to make your new payments and if your house is worth less than you bought if for, then since you are not paying down your principal with this type of loan, you could end up in a real bad situation where you can't afford to stay, but can't leave either because you can't sell the house for enough money to pay off your loan. And don't forget, when you sell the house, you also have to figure in the cost of selling, like real-estate commissions and taxes. These loans were created by the lenders when the refinance boom hit bottom and they wanted to keep the gravy train rolling - they simply created a product that was easier to qualify for so that people who couldn't qualify before, now could do so. Of course, these were also the people who were the most likely to default. Note that at this time, the govt. is starting to force lenders to qualify borrowers not at the I/O rate, but at the fully amortizing rate. In other words, if the I/O payment would be, say $800 a month for a loan where you don't pay any principal, it might be $1400 a month if you did pay the principal. The govt is telling the lenders that they must qualify borrowers at the higher payment amount. So you may not qualify for the loan anyway. As far as insurance and taxes are concerned you would make escrow payments for them as per normal and they would be dispersed as necessary by the bank to the insurance company and the taxing authority. Most banks will force you to have the funds held in escrow - they want to make absolutely certain that these payments are made and they don't trust you to do it. They also make money through the float - the interest the money makes by sitting in the escrow account before the money is dispersed. As far as being bound to the loan for a period of time is concerned, outside of getting screwed as I described above, different products will probably come with prepayment penalties - so you could be bound to it unless you pay the penalty. The penalty periods will vary from product to product - you will have to discuss this with the lender. I work for one of the largest home mortgage companies in the world. I know how these guys rip off people. Don't take an I/O loan unless you know you can afford to pay for it under the absolute worst conditions - where the house is worth less than the loan (negative equity) and the interest rate is maxed out and the I/O term has expired so you are also paying the principal.

Answer 3

interest only loan has a good side and a bad side like everything else. It's really depend on the real estate market. I had my interest only loan done back in 2004. At the time the market was still good.. now my home equity went up almost $100k. Since the market extremely slow now, I wouldn't recommend anyone do interest only. There are too many new constructions and sellers.. not enough buyers .. because everything cost way too much.. plus, like myself, if i refinanced or sell the property with in 3 years. My penalty is $16k >_
Over all, real estate investment is fun. but do it when the market is good ^_~ safer. lol

Good Luck!!!!

Answer 4

If the botton drops out of the market (housing market) you could take a nasty beating.
If it increases, you could do ok.
It's a roll of the dice as is any short term investment in real estate.
As for taxes and ins, that would be between you and the lender. Don't hesitate to ask these questions. What am I responsible for???

Answer 5

You probably won't save enough in lowered payments to justify the expense involved with refinancing. You might also check to see if your current mortgage carries a prepayment penalty, which is getting more and more common.

Answer 6

Interest only loans are an extremely bad idea since you never have any equity being built since the principal is never paid on.

you still have to pay full insurances and taxes.

I would simply keep trying to work the market and find unique ways to bring buyers to your doorstep