Question about interest only loan?

Question

So everyone freaks out when they hear "interest only" loans. But with a regular loan, all interest is lumped to the front of the loan anyway and you end up paying less than a $100 a month toward principle anyway. So is "interest only" really that bad?

Oh, how do they come up with a lower monthly payment anyway? I don't understand that part

To the guy who said you never pay principle ever on an "interest only"...that is not true. Any extra payments you make go straight to principle. Just like a regular loan

Answer 1

People that answered this question are paranoid. I totally disagree with what they have all said. For some odd reason everyone is under the impression that a 30 year fixed mortgage is the only way to borrow. Let me give you some facts that will put this all in persepective for you.

the 30 year fixed is the standard today, but if you go back 2 generations, anything over a 15 year mortgage was considered risky. Why? Because those were typically the only loans available and mortgages on a 15 year were more affordable because houses were more affordable.

After the great depression, there was a huge fear that banks were going to take your home (because that's what happened), so people thought that any mortgage on your house was risky.

Over the years, mortgage lenders have become so heavily regulated that if they go bankrupt or fail (like they are now), they can't call on their note like back in the day.

Now, to present day. As a mortgage planner, I help my clients take advantage of any loan opportunity that fits their needs. First things first. The average American moves or refinances every 4 years. Refinancing usually cost 2.5% in closing costs. The point is that if you take out an interest only mortgage, you should expect to be moving out before your rate becomes adjustable, prepare a budget to pay a higher rate when it become adjustable or know that you'll need to refinance again.

For some reason people forget that in the long run, real estate increases in value nearly 6% a year. Granted, the market is in a bit of a correction period, but in the long run you should let your home grow in value and not concern yourself with how much you are paying your mortgage down.

You should also be saving 10% of your income in a 401k or savings account. this way, if you have to bail out your mortgage, you have the cash to do so.

The main reason why people get in trouble with any mortgage (30 year fixed as well) is that they don't have an exit strategy if things change. Things? Job change, property tax increase, property insurance increase, mortgage rate change, illness or medical bills... if people work with the proper planner, they will fit you with the proper loan. If you are simply taking a loan because it has the lowest payment doesn't mean you're getting the best deal.

As for the nay-sayers that read all the bad publicity, I suggest that you do a little more homework.

Answer 2

The really bad interest only loans are the negative amoritization. For example, the first 3 years you pay 4% interest only on the mortgage. The balance of the 10% interest rate is tacked onto the principle. At the end of 3 years, the interest rate you pay goes to the 10%.

Thus the monthly payment more than doubles and the loan amount has increased to more than the value of the home. Gets even worse when there's a second mortgage with the same interest only features.

Throw in some variable interest rates that make it even worse and you have a lot of freaked out people. Folks who got into this kind of mortgage really couldn't afford the house and didn't understand the consequences of such a mortgage.

Answer 3

The interest only feature is very risky. With some areas in the united states the value are declining so quickly that you could owe more than it's even worth. Not to mention the potential of negative amortization where your may even go up, and you are not paying any principal of the down. Most mortgages are simple interest (not a rule of 78' where interest is upfront) where you pay interest and principal that pays down the debt. Thus your equity in the property is the difference between what you owe and how much it's worth on the market on the day you decide to sell, that market value can change frequently. The statement you made "paying less than $100 to principal" can not be validated as this would depend on the size and term of the mortgage. Simple interest means the interest is unearned, so when you pay June's payment of P&I you are paying May's interest that is earned. If you make a $5,000 pricipal payment in May, then Junes interest payment amount is smaller than if you hadn't made the additional principal payment. In turn, your loan term is naturally shortened because simple interest is based on the unpaid principal at time the payment is made.
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Answer 4

With interest only you pay NO PRINCIPLE. EVER.


****** Of course if you make an extra principle paymnet it goes to principle. Most people who get into these loans don't do that though. That is certainly a possibility though.


You are simply giving money to the bank every month.

When you sell the house, you get any equity that has built up, but that's it. If the market declined after you bought the house, you'd pretty much be stuck.

True the first year or so only a bit of each payment goes to principal, but many of us pay extra principal payments or finance their home for only 15 years so that is not the case.

Getting an interest-only loan is almost always a sign of someone who is not in the proper position to buy a house, or is buying WAY TOO MUCH house.

Answer 5

Interest only loans were designed for DISCIPLINED individuals, and that is why very often, they are not offered to first-time homebuyers.

They were also created for extremely high-cost areas such as California, New York and Miami, so people could stop renting and actually purchase a home.

So yes, they are bad loans, because if you pay interest only, you will NEVER pay off the house.

What you are supposed to do is have a lower paying option if you run into a bad month....but they are designed so you can control how much principal you pay each month or as an option for fast-growing equity situations.

They are simply, not for first-time homebuyers.

Answer 6

First of all, interest only loans are ADJUSTABLE. The interest can go up... way up... and if the interest rates go up and home values go down... which is happening now,,, you are screwed. You are forced to pay higher payments and you cant sell your home without bringing cash to the table.

Secondly, yes, you pay mostly interest in the beginning... but eventually, you OWN your home.

Answer 7

easy answer: do without Yeah, i understand, that's totally not easy yet merely think of of not having to respond to to Allah for all those haram issues. besides, if we lived in a great and pious Islamic community we'd help one yet another out extra with halal business enterprise loans and partnerships and so on. meanwhile you merely lease and scrimp and save and pay money for each thing or placed it on a card and verify to pay it off in finished each month so no pastime is charged.

Answer 8

as far as i know if you take a 30yr mortgage for $250,000 with 5 yrs interest only then your actually will be paying 250,000 in 25 yrs which raises the payment for people.