Interest Only Loans?

[ktschris]

I have been hearing a lot about interest only loans lately and was wondering if someone could explain what the benefit of this type of loan would be. Would it not really be like ?renting?? Does the principle become due at some point during the loan? Thanks in advance.

 

[Mango]

Interest-only is an option that can be attached to any type of mortgage.

For example, a 30-year fixed rate mortgage of $100,000 at 6% has a monthly payment of $599.56. This is the fully amortizing payment -- the payment which, if maintained over the full term of the loan, will just pay it off.

In month 1, that payment divides into $500 of interest and $99.56 of principal. In month 2, the payment remains at $599.56 but the breakdown is $499.50 and $100.06. Each month, the interest portion declines and the principal portion rises. After 5 years the balance is $93,054. That is how mortgages amortize.

Now lets attach an interest-only option to this mortgage, available, say, for the first 5 years. That means that the borrower need pay only $500 a month during the first 5 years. There is no payment to principal.

If the borrower exercises the option, therefore, the balance after 5 years is $100,000. There is no amortization. Beginning year 6, the borrower must begin paying $644.31. That is the fully amortizing payment for a 6% loan of $100,000 for 25 years.

 

[ktschris]

So the benefit of this type of loan would be if you are not planning on staying in the home for more than 5 years to keep payments down? But then how would you be building any equity in the property?

 

[Mango]

So the benefit of this type of loan would be if you are not planning on staying in the home for more than 5 years to keep payments down? But then how would you be building any equity in the property?

If the property is not appreciating, and your making interest only payments, then you are not accumulating nay equity.
These loans were designed for people who get bonus income, were expecting large payouts, people who are self employed like lawyers who may get paid on a big case etc. The people who use this loan correctly prepay principle when funds come due. It is NOT designed to buy a house because it's the only way someone qualifies for a mortgage.

 

[destinsm]

So the benefit of this type of loan would be if you are not planning on staying in the home for more than 5 years to keep payments down? But then how would you be building any equity in the property?

Oh boy... I thought everyone knew this...

Houses appreciate at least 15% a year, so who needs to actually waste their own money and put it toward principal... :roll:

 

[andipandi]

Please be nice. Not everyone knows everything. See how nice Mango is to explain.

KTS, as someone who has learned the hard way I would not recommend IO loans. I know a number of people who did it to procure houses in sowal area for investment including us. If your house depreciates you are really in deep trouble. We had planned to sell it in a year now we cannot at a loss.

 

[destinsm]

Please be nice. Not everyone knows everything. See how nice Mango is to explain.

KTS, as someone who has learned the hard way I would not recommend IO loans. I know a number of people who did it to procure houses in sowal area for investment including us. If your house depreciates you are really in deep trouble. We had planned to sell it in a year now we cannot at a loss.

OK, I'll be nice this time...

The last time in our history that IO loans were as popular as they have been for the last few years was just prior to the Great Depression...

So basically if you are not educated and using them for what they are designed for.... STAY AWAY...

 

[Cheering472]

Oh boy... I thought everyone knew this...

Houses appreciate at least 15% a year, so who needs to actually waste their own money and put it toward principal... :roll:

I know alot about dentistry perhaps I can make you feel inferior by talking about endo or perio treatments.

I work in the investment industry and believe that housing doesn't always "appreciate at least 15% a year" (see housing bubble) but I wouldn't try to belittle you because you seem to believe it.

Kindness before knowledge please.

 

[Cheering472]

oops sorry...You apologized before I posted.

 

[destinsm]

I know alot about dentistry perhaps I can make you feel inferior by talking about endo or perio treatments.

I work in the investment industry and believe that housing doesn't always "appreciate at least 15% a year" (see housing bubble) but I wouldn't try to belittle you because you seem to believe it.

Kindness before knowledge please.

I was being a bit sarcastic in my comment...