I don’t understand 'em. (even though I have one as a second on our house.)
When you lease a car, you’re paying for the depreciation. When you have an interest only loan on your house, you’re only paying for the interest on the loan and not [aying down the principle…so how does the loan company get back the money loaned to initiall buy the house? It seems like every house will have a large chunk of money tied up they they cannot use…unlike a ‘normal loan’ that eventually gets paid off, allowing the loan company to repurpose that money in another loan…
On the buyer’s side, you’re assuming the house will still appreciate in value faster than you could pay the house off normally…but is this the case? About 30 years ago, my parents had a 20,000 house…my first house was $150,000…will it REALLY be worth 1.25 million in 30 years?
Money makes my mind hurt.
Hi there. I’m a bank.
I’ll loan you $150,000 to buy that house. Since home values typically increase over time I don’t need to worry about getting the money back. When you sell the place, you’ll pay me $150,000 to clear the loan. If you foreclose, I’ll repo the house and sell it for at least $150,000–I’ll get my principle back.
And I’ll make this offer more attractive to you by giving you low, LOW payments. Now the only catch is, the only equity you get in the house is what it appreciates as the market changes. You won’t be buying any equity from me until you’ve taken care of the loan interest*.
So I win–my principle is fairly secure, and I get MORE of the loan’s interest collected sooner, without losing/selling the house’s value to you. And YOU win because you can get more house with smaller payments right now.
*You eventually need to pay the principle back, you just take care of the interest first
In addition to what Inigo said…
The interest collected isn’t the only thing about your loan that has value to the bank. They also make money from loan servicing, or selling the right to service your loan. Banks also sell loans into the Secondary Market as mortgage-backed securities.