How about someone provide a good description of the benefits and drawbacks of interest-only mortgage loans and the scenarios when such a loan is advantageous?
I have been exploring this too. Benefits- Your monthly payment is less and frees more money to invest in the stock market. My financial advisor (since he would make more money if I did this) has been pushing it. His argument is the the stock market over a 30 year period has a greater return rate than real estate over the same period, this is based upon history and not current conditions. The other benefit would be if you were only planning on staying in the property for short period of time, say less than 5 years. Invested the principal in account or in your property. The negative is that you never pay down your debt or own the house. Your are banking on the stock market and that the value of the home will increase. Some would argue with the potential of a real estate market crash it is risky. I have read that these types of loans have been only available to the super wealthy and only recently been made available to the Average Joe. Some argue that this is one way the rich have gotten richer.
I think these are a really bad idea. If your investment returns lag the interest payments and the value of your home stagnates or declines, you are in deep doo-doo.
Advantageous is you aren't going to be in/owning the house very long. If you can't afford to make full payments now but are somehow going to be able to afford them in the future. If you're 'buying' the house but effectively treating it like a rental (interest only for a few years, then you sell it and move); or you're trying to 'flipp' the property. Not a good idea if you plan on being in the house for a while. You're going to have to pay back the principal, eventually. Often used to get financially un-savy consumers to buy more house than they can afford.
Genius if you live in an area of continued property value increases like California and Florida. Risky for anyone else.
Way way way too risky. The only time it is useful if you are going to be in the house for a short time, but then there are those like me who say you should not be buying a house if you know you will only be staying in it a short time. I see no real benefits to this and seems to be just another way to get people to try and afford a home they really can't. Andy
They been talking about the bubble bursting in Cali for 30 years now...and in Florida for 15. I think you are pretty safe in those areas.
I'm not trying to be contoversial, but, intrest-only loans place more risk on the lender than the borrower. That is why the interest rate is always higher for an intrest only loan than its amortizing counterpart. Remember, you get to keep the principle portion of the loan payment that the lender gets in an amortizing loan. If you are nervous about the value of your house going down you can stash the portion of the payment in an "Al Gore Lock-box". Also, if the value of your property declines, nothing happens to the mortgage. The only time you will end up short is if you are forced to sell the house and pay off all liens. So, if having a loan on an asset that is worth less than the collateral is your definition of risk, yes they are more risky than amortizing loans. By your definition of risk, auto loans are waaaaaaay to risky. Because car loans are "only a way to get people to try and afford a car they really can't".
There are many types of safe and excellent home loan mortgages one can get to buy a house. I just don't find interest only mortgages to be of a better benefit than those. I have never had a car loan but I am not aware that there were various types of car loans one could get so that they could be compared and contrasted. Andy
less then five years and in a rapidly escalating market? Genius! If you plan on buying your long term home in peoria.. avoid baby.. avoid...
You mean I just pay interest and never pay principle. I might as well rent since I'm wasting my money? YUCK!
Well, your entire monthly payment is tax deductible so that might be a plus for some folks. You can't do that when you're just paying rent.
Indeed. My neice and her husband just did one of these and when they first told me about it, I was horrified. However, on further reflection I realized that it allowed them to get into a nicer house for the same money and as long as property values stay at least constant (almost a certainty), it will be fine. Also, it's not interest-only forever. Eventually they have to start paying principal but face it, the amount of principal you pay in the first few years of a mortgage is negligilble.
Maybe I am old fashioned, but interest only loan seems like a bad idea. I really get scared when people say prices can go up indefinitely. The government through tax and fiscal policies has created uncertainty in the housing market.
Sure. But, let's say you're in the 25% tax bracket and you pay $10,000 a year in house interest (yikes). You only save the percentage of whatever tax you pay. So, in other words, you're going to pay $10,000 to the bank to keep from paying the government $2,500. Doesn't sound like that great an idea to me.
Good point. In areas where the dream of home ownership is available to a select few, interest-only doesn't sound too bad.
Except that nearly 70% of Americans own their own homes. My buddy works for HUD and he was telling me about the vast number of programs out there that help low income people buy and maintain their homes. Some are public sector and others are private, but there are an awful lot of resources out there. Sachin
Other than a few select circumstances, Interest-Only makes no sense in today's extremely low interest rate environment.
Nearly 70 percent. no kidding. i live in the bay area so i'm out of tune with the real estate market everywhere else.