Of course this seems too good to be true. Can a Doper who has “been there & done that” or is otherwise knowledgeable enlighten me as to what the catch is? You could save me (and perhaps others) an hour of valuable time.
So, basically think about this, if you are only paying part of the interest every month what happens to the rest? They add that money back onto your loan. You will owe more money instead of less every month on your loan. It is called negative amortization.
Basically loans are set up with the interest loaded up front. On that typical $1800 payment at 6% interest about $1500 of that will be interest. If you are paying only $1000 a month that extra $500 you still owe, they just let you pay it later.
After about 5 years the loan will be refinanced. Your payment will change! And it will most likely be more than the $1800 payment you could have now!
You are taking the risk that your home will increase in value enough to offset the difference in interest you pay. They don’t hide that:
Ask yourself… if the going rate for a fixed mortgage is 5.5% (or whatever), how can someone offer a 1% mortgage?
Interests rates are very likely to increase in the near future. But for now, the interest rates on fixed-rate loans are still fairly low. My advice to any new home buyer is to only look at 15, 20, or 30-year fixed loans.
If I understand correctly, it would function like a credit card where they mug you for 29.99% APR but only demand a $20 minimum payment each month for the first however long. And give you a $15,000 limit and tell you to charge away.
Great from a cashflow perspective during the introductory period, but oh my :eek: when they call your friend up to tell him the introductory period is over and they want their pound of flesh, he’ll not be happy.
Make a note of this, Mr Duality. Remember it. It is wisdom.
My understanding is that for this to work for you, you have to be buying a property with the goal of re-selling ( at a substantially higher price) before the initial period is over. This could be a beneficial situation if you bought a house, remodeled and then sold as you would have more available cash to put into the remodel.
But this example is really of a business, the business of remodeling houses. I don’t think those kinds of loans are intended for, or a good option for, just someone who is buying ahouse to live in for an indefinte period / forever.
IANA whoever-might-really-know-something-about-this, just what I’ve heard around the water cooler.
There’s a pretty dark downside on this offer, as has already been said: After five years, you start paying off not only the principal loan but also the accumulated interests you didn’t pay during the introductory period. But at least they’re honest enough to state that pretty clearly:
(From jsmith’s link)
It sounds a bit like a pyramid scheme: You get the loan now, but you don’t pay any (or ridiculously low) installments now, postponing your payments into the future. This means you have more money available now than in an ordinary scheme, which you can invest in even more real estate. In five years, you’ll start paying hefty installments, but, so they say, you can afford them easily because your real estate has increased in value significantly. These profits, of the rent revenues, can be used for the installments.
Sounds good in theory, but if the real estate prices don’t go up fast enough,you have problems.
Although it would be exceedingly wise to go into this deal only if you are fully aware of the pitfalls, it’s not all bad. Let’s say you are in a financial situation where your income will be low for the next few years, but shoot up dramatically after that (Perhaps a medical intern close to moving into a practice). Then this kind of loan might make sense even though the total paid might be high over total time.
I once took out a life insurance policy similar to this, where the premiums were artificially low for the first 5 years, then increased significantly. It was designed for “young professionals” who had very little initial income, but great expectations. (Of course, I cancelled it as planned after 4.9 years, so I wonder what the insurance company was thinking, but that’s another story.)