Interest-Only mortgages???????

Hey DJ Pill, I think you wroe one how bad these things are. Please tell me more!!!

We fell in love with a house we bascially can't afford unless we take a 30 year mtg, where the first 5 years are interest-only.

Meaning, our initial payments are less but we also have no equity in the home b/c we are not paying principal. The payments toward the principal do not come til after the 5th year.

PRO:

1.You can buy a house you otherwise could not afford. Like us, who are having a hard time finding anything on LI under 300 that doesn't need to be condemned. (We also need to be near a train station b/c we both commute).

2. You CAN pay toward the principal, you just don't HAVE to.

CON:

1. Paying toward the principal would mean reallllllly pushing our budget towards eating ramen noodles every night.

2.?????

Please tell me more cons!!!!!!!!!

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Posted by cluelessbride

1.You can buy a house you otherwise could not afford.

1. Paying toward the principal would mean reallllllly pushing our budget towards eating ramen noodles every night.

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The one and only CON... you just mentioned is enough to not do it.

Don't live beyond your means.

If you can't afford a 30yr mtg on the house.... you can't afford the house.

An interest-only loan is simply a rental. What happens if the value of the house goes DOWN instead of up? You are screwed bigtime.

Optionally paying principal on an interest-only mortgage is pure financial stupidity since you will be paying TONS more interest with the interest-only mortgage. Throwing money away and defeats the real purpose of getting the loan.

Some people even take out 30yr mortgages that are 'too expensive' for them and they live beyond their means. Interest-Only mortgages are simple idioticy for most.


The only PRO to an interest only mortgage is the contractor or builder who simply buys a bunch of houses for cheap to fix up and renovate... and flip them over for a profit. They have no need to put down principal since they are owning it for such a short time.

Also.... whats the deal with only doing Interest Only for the first five years? Do you plan on re-fi in five years on your own or is it a bank program that kicks over to conventional after 5 years? Are the future rates guaranteed?


Oh and one other thing I forgot to mention that nobody else will. What happens if you take out this Interest Only loan... and then decide to get DIVORCED down the road?

And you can't say 'oh that will never happen' cause think of the stress that will be there when you have no income in the family to do anything besides pay a mortgage.

You will be forced to sell the house... and you may actually OWE money to the banks and be in a negative financial situation than from when you started?

Why do you think there are SO MANY FORECLOSED homes on the market right now? Cause people are buying beyond their means.

i do agree that a lot people on LI are 'house rich, pocket poor.'

whether you take out an interest-only or fixed mortgage there is NO GUARANTEE that the house will increase in value.

personally, i would only take out an interest-only if i was putting A LOT down and only plan on staying in the home for about 5 years. this way you already have a good deal of equity in the home and the monthly payments are low.

i believe IO and ARM type products were originally geared towards the super rich and/or people who have commission based salaries or bonus' they use towards larger lump sums along the way. these are the same people who can afford to take a 'hit' if interest rates go up as they can shift $$ around and pay off what they would owe.

ARMs are a little scary for me (although we may elect to go this route), an IO even more so...for the reasons everyone has mentioned...

i have a lawyer friend who has an interest only loan on his home in LI...it works for him...
every couple of months he is able to put chunks of $$ into the principle, thus decreasing his monthly int only payment... plus, he comes out on top during tax season with all the deductions...guess it all depends on the particular situation.