Interest Only Loans
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Quackzilla
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Just don't, only paying interest is stupid.
You will be in debt to the loaner for your whole life if you just pay on the interest.
Say, for example, you get a $150,000 for a house. With an interest-only loan, in 30 years you will still owe them $150,000 because you never paid off any of it.
You will be in debt to the loaner for your whole life if you just pay on the interest.
Say, for example, you get a $150,000 for a house. With an interest-only loan, in 30 years you will still owe them $150,000 because you never paid off any of it.
mcwilliams132
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It means exactly what it sounds like.
You only pay the interest on the loan...no principle. You never pay anything toward the paying down of the actual loan.
So if you have a $100K mortgage...you're typical payment may be about $800 with about $500 of that $800 is interest...
Yeah it's cheaper...but in the long run, you'll NEVER get ahead.
You only pay the interest on the loan...no principle. You never pay anything toward the paying down of the actual loan.
So if you have a $100K mortgage...you're typical payment may be about $800 with about $500 of that $800 is interest...
Yeah it's cheaper...but in the long run, you'll NEVER get ahead.
ArthurDigbySellers
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[quote name='Quackzilla']Just don't, only paying interest is stupid.
You will be in debt to the loaner for your whole life if you just pay on the interest.
Say, for example, you get a $150,000 for a house. With an interest-only loan, in 30 years you will still owe them $150,000 because you never paid off any of it.[/QUOTE]
While this may be true in theory, it totally depends on where you live. My wife and I have an interest only mortgage on our house right now. We opted for this type of mortgage because the real estate market is insane here and house values just keep rising. People's houses are doubling in value in under 10 years and it's been this way for a few years now.
When you are in an area of rapid growth, you are still earning equity in your house without having to pay anything towards principal - and you are earning WAY more equity by this growth than by paying a few dollars towards principal once a month.
Also, there isn't anything preventing you from paying extra towards your principal each month if you want to. Most interest only loans will recalculate your interest based on the new principal if you decide to pay extra towards it.
So it really depends on the housing market where you live. It can actually be easier to get equity in your home if the market is booming.
You will be in debt to the loaner for your whole life if you just pay on the interest.
Say, for example, you get a $150,000 for a house. With an interest-only loan, in 30 years you will still owe them $150,000 because you never paid off any of it.[/QUOTE]
While this may be true in theory, it totally depends on where you live. My wife and I have an interest only mortgage on our house right now. We opted for this type of mortgage because the real estate market is insane here and house values just keep rising. People's houses are doubling in value in under 10 years and it's been this way for a few years now.
When you are in an area of rapid growth, you are still earning equity in your house without having to pay anything towards principal - and you are earning WAY more equity by this growth than by paying a few dollars towards principal once a month.
Also, there isn't anything preventing you from paying extra towards your principal each month if you want to. Most interest only loans will recalculate your interest based on the new principal if you decide to pay extra towards it.
So it really depends on the housing market where you live. It can actually be easier to get equity in your home if the market is booming.
Thanks.
We're just trying to get into a new house and out of our current one. I thought you just paid all the interest on the front or just for the first 5 years or something, then it was normal morgage.
We're in the situation where I'm not sure how the neighborhood will hold up in 5 to 10 years, and we want to start a family, but not until we have the house we want. Figured we just save the money we aren't paying on morgage payments and use that to pay later. Guess it doesn't work that way.
We're just trying to get into a new house and out of our current one. I thought you just paid all the interest on the front or just for the first 5 years or something, then it was normal morgage.
We're in the situation where I'm not sure how the neighborhood will hold up in 5 to 10 years, and we want to start a family, but not until we have the house we want. Figured we just save the money we aren't paying on morgage payments and use that to pay later. Guess it doesn't work that way.
Yeah, what lebowsky said is correct for the most part. However, if you are considering getting an interest only loan, you should pay it as if it was a normal 30 mortgage loan. Why? Because, as lebowsky said, your interest is being recalculated all the time so it always helps to pay extra since in the long run it will end up being cheaper AND you'll have more equity than you normally would, to boot. Always good to have extra equity. Equity is better than having money since money's intrinsic value will fluctuate yearly (sometimes monthly if you go by gas prices) and equity can be used as collateral assets when getting a business or home equity loan. Heed the warning though: if you're of the lazy type and would rather make minimum payments, it's better to look for another type of loan since, as mcwilliams said, you'll only end up paying primarily for the interest only.
The only absolute rule you should follow is that you should only take out an interest-only loan in an area that the housing values are rising at a higher rate than the interest.
Other than that, go nuts. Most interest-only morgatges will allow you to pay down the principal on an annual or bi-annual basis.
Other than that, go nuts. Most interest-only morgatges will allow you to pay down the principal on an annual or bi-annual basis.
secretvampire
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The whole thing with these loans is you are taking the risk that the value of your home must continue to rise or at least stay even. If the real estate market in your area tanks, be ready to own a house that you can't sell or have to sell at a huge loss since you own no equity in the property. Just my humble opinion, I think these are a bad idea. They trick people into thinking they can afford a much more expensive house than they can. You may think you live in an area where your home prices will rise forever, but it's impossible. Someday, it will tank, just hope you aren't there when it happens.
^^ most houses throughout the country are raising faster then 5 - 7%, which is the approx rate on a 30 year loan....If you are looking to either flip the property, or plan on living there no longer then 5 years, go for the % only...you can get a 5 year arm for mid 5%....paying only on the interest, it would be better investment, lets say the % was going to be $700, and the principal would be $300 a month...a better investment then putting it into the house, is to put it into mutual fund, their are several funds that avg 10% a year growth...you will be making 5%..now some will say you can loose money in the stock market...it is the same in the real estate market, their will be high's and lows, but in the end both over time will always will see increases
the other thing to look at, with the interest only loans (going under the assumption the % only is for 5 years) ...someone had stated it gets people into houses they can't afford..that may be true now, but most people are planning on getting higher wages in 5 years...if you are planning on increasing your income, in the next couple of years you could do the % only, when you get a raise, take that extra income and apply it to your loan, thus cutting down on the principal..
the other thing to look at is, while rates will go up over the next 5 years, but will the refi rate be higher then then then the current 30 year loan rates are now...it will all be speculation, numerous things can happen, but if you look at historical rates over 5 years periods, you should be able to take a good guess...if you feel refi rates will be less 5 years from now then the current standard 30 year rates, then you may want to only pay % loan, and refinance in 5 years, at a lower rate, that will be cheaper to make your monthly payments and be paying on the principal
the other thing to look at is, while rates will go up over the next 5 years, but will the refi rate be higher then then then the current 30 year loan rates are now...it will all be speculation, numerous things can happen, but if you look at historical rates over 5 years periods, you should be able to take a good guess...if you feel refi rates will be less 5 years from now then the current standard 30 year rates, then you may want to only pay % loan, and refinance in 5 years, at a lower rate, that will be cheaper to make your monthly payments and be paying on the principal
If we're talking about investing only purposes then yes, interest only loans would be a better vehicle but the OP is looking for more of a home so I think it wouldn't be advisable unless the property values are rising or steady. As for the comparision between stocks and real estate, real estate is generally a better vehicle because the rates aren't as volatile as stocks are. There's an inherent buffer zone to real estate that stocks don't have. If rates are decreasing in real estate, it's easier to notice and compensate for unlike stocks which you may have minutes (or even seconds) to recover.
^^^ true, but I wasn't suggesting to invest in individual stock, their are several very diverse funds, that have been avg 10% ++ growth a year for the past 10 years...their is no guarantee in anything, and if real estate in ones area starts to plumet, it would be tough to get out of it
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