Having read some of the last posts before mine, let me say that I used the IOL to basically finance my downpayment. I don’t think I’d recommend putting the whole mortgage on one of these things. AND, I only did it because I have no car payment right now and can afford to pay off the principal long before the balloon thing happens. If this is the only way you can get a loan for a house… then you can’t really afford a house, IMHO.
To answer this :" Are these loans interest-only for 30 years? or just for the first few years? What will happen to their interest rate? Do they require a balloon payment or do they automatically convert to a fully-amortized loan at the then-current market rate? To many “what-ifs” for my taste."
First, IANAMortgage Broker, nor do I look like one. I would suspect that these IOLs are all different. Mine was a 10 year ARM. At 10 years, balloon payment comes due on the principal, presumably I’ve made the interest payments over ten years and you can refi and roll the principal into something else (like a regular amortizing loan) or roll it into another 10 year ARM at whatever the rates are when you close. My broker did not want me to pay it off. There is a penalty if I paid it off before two years are up. I can only manage to do it in three – so I’m still saving 7 years’ worth of interest in addition to building up my equity.
There are lots of what ifs. I asked a lot of questions about this one loan. There’s tons of these out there. I think it’s worth looking into, again, if you’re smarter than the loan. Had I taken my broker’s recommendations and made interest-only payments, then I’d be inviting you all to call me “Sucker.” If I’m suddenly unemployed or something, I need to unload that thing – I’d refi the whole thing with my primary mortgage and pay a little PMI, I guess.
I’ve been talking to my SO about this quite a bit, because he has an interest-only mortgage on his house, and is now interested in refinancing. I had never heard of IOLs before meeting him.
So, coming from a total financial dunce (me), why would an IOL be better for people who are looking to stay in a home for only a short time? What are its advantages for the short term that don’t play into the long term?
For a short-termer, the reason they’re less outrageous is that you’re not paying off much principal initially. Let’s say you can get a 30-year fixed loan that costs 1,000 a month. The first month, you pay 50 in principal (I’m totally making these numbers up, BTW). So at the end of the first year, you’ve paid off 600+ dollars in principal. Your total payment for one year is 12,000. So 12,000 minus 600 = 11,400 is your net cost for that year.
With an interest-only loan, the rate might be lower so your payment would be, say, 900 dollars. So at the end of the year, you’ve paid 10,800. So there’s a short-term cost savings. Longer-term, you’re losing out because the rate (and payment) will probably rise while your debt isn’t decreasing.
Basically, it seems to me that a standard interest-only loan is only worthwhile if the payment is enough less than an amortized loan to make up for the principal. Or the fees are enough lower, etc.
As Mama Zappa points out, the early years of a mortgage are almost all interest payments anyway. If you only plan on having a mortgage for a short time than interest only can make a lot of sense because of the money saved.
I’m in an intersest only loan right now. It’s a construction loan. Now that construction is complete I’ll be re-financing into a new loan that is more for the long term. (I plan on staying put for 3-5 years.)
Sure, some foolish people out there are probably getting interest only loans because they like the low payment and aren’t thinking it through. But, this is probably the exception rather than the rule. It’s sort of a by product of the soaring real estate market that some people are lashing out at certain aspects of it. Recently it seems like I keep hearing about the evils of interst only loans.
It really just isn’t a sign of the coming real estate apocalypse. These types of loans make good financial sense for a lot of circumstances.
Basically then, is my analysis of an interest only loan correct? http://www.1728.com/intonly.htm
Also there is a link to an amortization calculator on that page.
