Interest Only Home Loans

[pastorables]

Does anyone here know much about Interest Only Home Loans and the pros and cons of going such route in borrowing?

I have read some about it on the web, but can't say that I fully understand it with authority. Any thoughts?

pa

[Mole_J]

From my limited experience in the mortgage business.

An interest only loan will give you lower monthly payments. As long as your home is going up in value this is fine, because the rising value of your house automatically gives you equity and you can easily refinance out of the loan. Most interest only loan are adjustable, so after the time of it being fixed you can refinance very easily.

If the value is falling (like most houses are now) this is not so great. Mostly because you end upside down in your house and you are stuck. If your fixed term on your house is over and is now adjustable, you cannot refinance it. You owe more than what the house is worth, and you are are the mercy of your adjustable rate.

With the housing market the way it is now, you are best to pay interest and principal so you can get some equity in your house, unless you are going to having a large down payment.

[pastorables]

With the housing market the way it is now, you are best to pay interest and principal so you can get some equity in your house, unless you are going to having a large down payment.

My current home loan is a 100% loan which has taken very little off the principle in almost 3 years. What I've read says that interest only is as good as 100% loans and often better in some cases.

pa

[dolfan]

It is, IMO, a scam and one, I predict, won't survive long term.

I.O. loans are traps. After the interest only period ends, you still have the rest of the term in which to pay the principal. That means higher principal payments and higher overall payments on the back end of the loan. If you're going to back-load on principal, why not front load on it and get a shorter loan?

Well, chiefly, because payments are too high, right? Okay, then, ask yourself this: Would I rather get something for the money I'm paying or basically rent from the bank? The money you pay in interest now and for the interest-only term is gone like rent money. Unless the home increases in value during that time, you're not gaining anything -- but you're losing fiercely. Banks make money on them, but homeowners don't.

If you're going to do an IO loan because the payments are simply higher than you want to pay, you'd be better off renting until you decide to buy with a conventional loan. Or, figure what you'd pay in principal and interest each month on a 3 or 5 year ARM at current rates, and, during the IO period, pay yourself the principal you'd normally pay a mortgage lender. Set that principal aside because when that payment doubles, you'll need it.

If the housing market continues to decline, you won't be able to refinance because your value will be less than your principal balance. You'll be stuck with a higher-than-market interest rate compared to current fixed rates, most likely.

Of course, refinancing is always an option if the value holds or gains. Don't buy a house with an eye toward refinancing it. Refis cost money. Unless there is a very substantial equity growth, it isn't worth it. And, today, that's not going to happen.

[pastorables]

Well, chiefly, because payments are too high, right? Okay, then, ask yourself this: Would I rather get something for the money I'm paying or basically rent from the bank? The money you pay in interest now and for the interest-only term is gone like rent money. Unless the home increases in value during that time, you're not gaining anything -- but you're losing fiercely. Banks make money on them, but homeowners don't.

What I've read shared that IO loans work well for executives and business owners who need to pay down other debts. That could work well in my situation?

pa

[one love]

I think I.O. is part to blame for the foreclosure rate. I know someone who did this , well refinance with a I.O. and pulled a good sum of money out of the home when the market was good. The payment was not bad either, now the payment is 4 times then before they refinanced and double from when they started the I.O.
Obviously Refinance- now is not an option because there is no more equity left in the home and the payment can continue to increase as well.

When the market was good this was a blessing to many in Va beach area, they got I.O. loans so there payment was low and then sold the house in 1 year and made a killing. Those days are over and I would avoid it , everything I have heard is this is robbery, a scam and the cause of our problem.

I think Dolfan is on point

Pastorables I am not sure how this could help a business owner could you go into detail how it could? I am interested to know what I am missing or the benefit I cant see.

[pastorables]

Pastorables I am not sure how this could help a business owner could you go into detail how it could? I am interested to know what I am missing or the benefit I cant see.

It creates cash flow to pay down other more pressing business notes. From what I've read you are under no obligation to make an interest payment every month, which opens up more cash flow to pay down business notes. During the five year IO window, in my specific case, I could pay off several business notes. I would then be free after five years to put that money toward the interest and principle of a refinance, etc. I don't think the IO is for everyone, but I could see it helping my specific situation, inasmuch as I've basically paid mostly interest anyway on my 100% loan.

pa

[darylscook]

Pastorables I am not sure how this could help a business owner could you go into detail how it could? I am interested to know what I am missing or the benefit I cant see.

It creates cash flow to pay down other more pressing business notes. From what I've read you are under no obligation to make an interest payment every month, which opens up more cash flow to pay down business notes. During the five year IO window, in my specific case, I could pay off several business notes. I would then be free after five years to put that money toward the interest and principle of a refinance, etc. I don't think the IO is for everyone, but I could see it helping my specific situation, inasmuch as I've basically paid mostly interest anyway on my 100% loan.

pa

I agree with Dolfan, Everytime you close or refi the banks get 4-6K in fees. I don't know your situation. Don't forget a lot of you payment is taxes, insurance, and PMI those will have to also be paid.

What happens in 3 years if the value hasn't increased and no banks want to loan 100% anymore and the IO rates goes up... IO is a very risky and costly loan in MHO.

Daryl

[Dr. Ron]

I helped open a mortgage company. I can tell you to "run, Forrest, run " from IO loans. They are no better for the mortgage industry than a multilevel company is for those in debt.

The best idea is to sell the home.......rent for however long it takes to put a sizable downpayment and finance for no longer than 15 years,

That is the ultimate.....and the only way to build true equity.

Home valuation is not true equity. As your house is upwardly valuing, so are the other homes in the area that you might would want to buy.

Just my .02 from 2 years in mortgage. No longer deal with it.

[DaJudge]

Pastorables,

Dolfan, onelove and Dr. Ron are right. Stay as far away from an IO loan. The mortgage company will RAPE you. This may not be what you want to hear, but it's true.

Get a boring, old fashioned 15 or 30 year, fixed rate conventional mortgage. (15 is better if you can swing it, you'll save a ton in interest in the long run).

If one can't afford the payment on a conventional fixed rate loan, then one should buy a less expensive house. If one can't afford the payment on a less expensive house, one should rent until they can afford it.

These nontraditional gimmicky loans are a big part of what is causing this "foreclosure crisis" that we are in now.

[Pastor Bill]

I know no one wants to hear it, but if you can't pay for it, you best not buy it, or sell it if you've already bought it. The less you pay on the principle of ANY loan, the more you are going to pay down the road. Overall cost this is a very bad idea. If you are in a situation where you're already over your head and this looks like a way to get out, I guess that's a possibility, but you are also setting yourself up for worse problems down the road, I'd only do it if you KNOW you'll have other things paid off in that time and will be able to really hit the principle hard after a short time, and even in that situation, it's probably not your best choice.

[DaJudge]

I'd only do it if you KNOW you'll have other things paid off in that time and will be able to really hit the principle hard after a short time, and even in that situation, it's probably not your best choice.

Yeah, and you'd probably agree PastorBill, that there is no way of ever really knowing that. Life happens and other obligations come up, and the hitting the principle hard thing usually never really happens. Like you said, if you can't buy the house by conventional means, don't buy it.

[Pastor Bill]

I'd only do it if you KNOW you'll have other things paid off in that time and will be able to really hit the principle hard after a short time, and even in that situation, it's probably not your best choice.

Yeah, and you'd probably agree PastorBill, that there is no way of ever really knowing that. Life happens and other obligations come up, and the hitting the principle hard thing usually never really happens. Like you said, if you can't buy the house by conventional means, don't buy it.

Yeap, it's like any of those "buy now with no payments till ____" deals, they are counting on you to overspend now, then they'll hit you with more interest later when most of the time you won't have any more money later than you do now.

[MacUser]

I totally agree btw on all the warnings.. but on the other hand...

I had an interest only loan on a second home that I owned. It allowed me to invest into the home and raise the quality/resell price of the home instead of paying a full typical note. Note: I did pay several big installments on the home bringing down the interest only note over the years... so you have to be disciplined to actually PAY on the principle etc. The biggest negative was that the note fluctuated based on the immediate interest rate. The interest rate practically doubled by the end of my ownership.

In the end.. I made a very nice profit when I sold it using that money to enhance and not divert cost.

So it depends on how you use it.

[dolfan]

I totally agree btw on all the warnings.. but on the other hand...

I had an interest only loan on a second home that I owned. It allowed me to invest into the home and raise the quality/resell price of the home instead of paying a full typical note. Note: I did pay several big installments on the home bringing down the interest only note over the years... so you have to be disciplined to actually PAY on the principle etc. The biggest negative was that the note fluctuated based on the immediate interest rate. The interest rate practically doubled by the end of my ownership.

In the end.. I made a very nice profit when I sold it using that money to enhance and not divert cost.

So it depends on how you use it.

Applause, applause!!! Perfect example of the way to use an IO loan. Can't do this on your primary residence, though, not in this market. I wouldn't recommend it in the market of 4 years ago, honestly, on your own home. But, way to swing it! That's good stuff.