Is anyone doing/heard of and Interest Only loan?

I heard about this just this past weekend, and I was wondering if anyone is doing this.

Also, if you are, do they make you stay with the house until you reach the cap percentage rate? Or can you refinance before you reach it?
Ex)
Say you start at 5.5%, and they raise you .25% every 12 months, with a cap of 12%. Do you have to wait till you hit 12% before you can refinance?

Also, do you know if you are getting equity in the house, since you are putting nothing towards principal? (unless you put extra in every month)

If anyone knows anything, I'ld greatly appreciate it!!!

TIA!
Christine

With interest only loans you'll only get equity in the house if it increases in value (unless you pay extra towards the prinicple every month). If you buy your home for 200,000 take out an interest only for 200,000 and then 6 months later your house is worth 225,000 you have 25,000 in equity. Did you meet w/ a mortgage broker or a bank to discuss the loan? If you did who did you meet with? We were thinking of doing this also but we need to speak to s/o first. Good luck!

i agree with lindak that you will get equity in the house if the value of the house goes up, but you would get that same increase in equity with a traditional loan as well. our financial advisor recommended to us that we do an interest only because we are not planning on staying in our home for more than 5 years. i would definitely not get an interest only if i was planning to stay in the house--you'll never pay off your mortgage. our advisor said that if you do interest only you will have lower monthly payments and suggested that we take the extra money and invest it. His theory was that it's all just a matter of where you are keeping your money-either in equity in your house where it is not making you any money or in some type of investment where you will get a return on your money. However, the interest rate is going to be higher on an interest-only loan. the rate we would get for the interest only was .375 higher than a traditional loan. and with interest only you will have the same payment every month because your principal amount will never decrease. with a regular loan the amount of interest you are paying will go down each month becasue part of your payment is being applied to the principal. paying into the principal means that you will start paying less interest and your monthly payments will start building some equity. also the amount of interest you have to pay will be less to begin with because you'll get a better interest rate. i did a bunch of research into this type of a loan because my DH thought it was a good idea and i had to convince him otherwise. for us i figured out that our payments would be a little over $200 less if we went with the interest only. i figured that if we invested that extra money each month instead of paying it towards the mortgage(assuming a 5% return) we would still come out ahead by thousands of dollars with a traditional principal + interest loan even if the value of the house stayed exactly the same.
i think some people do interest only so that they can afford a more expensive house. we were just considering it as what would be a better investment opportunity. if you're doing it to afford more and you can live with the higher interest rate and pay what extra you can each month, i guess it might be something to consider. otherwise i don't think it's worth it. JMO

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Posted by bride04

However, the interest rate is going to be higher on an interest-only loan. the rate we would get for the interest only was .375 higher than a traditional loan. and with interest only you will have the same payment every month because your principal amount will never decrease.

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This doesn't sound right. .375 higher than a traditional loan. What do you mean by a 'traditional loan'. 30yr fixed? 3/1 ARM?

Are you saying that if the current 30yr fixed rate is 5.5%... you are going to pay 5.875% for the interest only loan?

we were quoted much LOWER rates on interest only loans as most of them were an adjustable rate. But if its fixed, it would be slightly higher.

you can always refinance at any time, but keep in mind interest rates are at record lows, so if you refinance, it will most likely be for a higher rate than what you could lock in for now. Also, refinancing costs $$$.

Yeah I was gonna say... its one thing if you are paying .375 % over the current 3/1 ARM that has a VERY low rate to begin with.

But if you are paying .375 % over the current 30yr fixed rate and you are only planning on living there for five years... I was gonna say you made a bad decision with that.

We are going w/ the Interest Only, for a few reasons, one is because our mortgage payment is LOWER, and this will be the 2nd house we own, and w/ paying another mortgage, we needed a lower mortgage payment, othewise we would not be able to purchase this house....gotta do what ya gotta do. It is not that I am favor of this, but it got us in the house for now which is what I wanted. Everyone needs to do what is right for their financial situation and we all know how hard it is to buy a house on LI ($$$), so regardless of how you got your house, you did it and the renting is over...

I think if you can eventually begin to pay over the interest payment each month, and then pay off some of your principal, it will work out for you.

If paying a traditional 30yr fixed mortgage is too much for you on the onset, doing it this way, and eventually taking yourself up to the payment of a 30yr fixed mortgage (and thus paying down your principal) is something we're thinking of ourselves.

We're thinking of this to ease the new costs of a house in the beginning, but eventually other expenses we have will go away (car loan, etc) and we can accomodate a higher mortgage payment then.

otherwise, in say 10 years when you have to start paying the principal, you have to pay that back over 20 years and the payments will probably be much higher than you are hoping for..

Good luck!!!