When you have an "Interest Only" Mortgage, WHEN do you pay the Principle?

[BiggJawn]

Loan Sharks buy a lot of ad time on WBBM, and I have to wonder.
So you get say, $250,000 and by paying "Interest Only", you cut your monthly payment in half.

So, when do you pay the Principle? After you've payed the Interst? And how does it fuck up the formula if you decide to start "doubling up" on payments after about 5 years?

And what happens when the bottom finally falls out of the market and you're holding $200,000 worth of paper secured with assets worth only $50,000?

Yeah, and *I'M* the stupid one for renting....My rent hasn't increased in 6 years!
I tried that "Murkan Dream" bullshit. Had a $72,000 mortgage on a house that supposedely apraised at $95,000. Went to sell it after I relocated and couldn't even get a buyer at 68. Foreclosed! Bankrupt! Have to buy my cars at "JD Buyrider"...:eyes:

[Walt Starr]

1. Generally, they become ARMs after five years

That's the fine print nobody wants to pay attention to.

The idea is, you buy. you live in it paying just the interest and after five years, you sell it for a profit, take that money, and make a down payment on another house.

It'd work out fine, if you bought say, four years ago.

Doing it now is whack.

[BiggJawn]

2. The Lenders never do anything that doesn't pay them first...

I found THAT out in my "Murkan Dream" (nightmare)

[oneighty]

3. I have a home equity loan

I owe less than 9000 dollars on the loan. I am required to pay only the interest of about 30 dollars a month. But I pay big chunks each month to reduce the 'loan' as quickly as possible. I have had this plan for just a few months and I think I will be liking it. I have a lot of equity money available if I chose to use it.

180

[htuttle]

4. I don't think you ever pay it

Those loans are sort of like modern day sharecropper contracts. You basically become a renter, but may not realize it (until you lose the house). Oh, and I'm sure that there are hefty pre-pay penalites to discourage people from actually paying it off.

I'm another renter, and the rent has hardly gone up (since there's the competitive rentals market to consider) in my 'all utilities-paid' apartment. AND I keep my nest egg in Savings CDs in a damned credit union! My brother used to call me dumb for not putting it into the market, but I've made 3% annually or so since 2000, while the stock market....has not.


I'm doing JUST fine being 'dumb' over here!

[SoCalDem]

5. Never...here's why

Most people sell houses every few years, so they are gambling that when they sell, they will sell for substantially more than when they bought.. Some of the interest only loans end in as few as TWO years, so alternate financing must be arranged prior to that or the loan is like a balloon payment.. DUE..

This is what a friend of mine is going though right now. they HAVE to get a new loan because their interest only ends in 4 months..

The kicker is this.. they declared BK a few years ago, and the interest rate that they might qualify for will be pretty steep, so they may be forced to sell their house and hope they can find a smaller cheaper house..

[enlightenment]

6. So, interest only loans are the equivalent of leasing a car?

At least in the sell it after a couple of years? I'm another person who has never "owned" real property, so this stuff is Sanskrit to me.

[meganmonkey]

9. Sort of - the difference being that in THEORY the value of the house

will increase, unlike a car which loses value over time...

I'm learning this stuff right now - I moved in with my SO last year and we are trying to sell his house.

[FLSurfer]

7. A loan that a mortgage broker was pimping

to me was interest only for 10 years. After that i would have to re-fi the balance. Into whatever type of loan I wanted.

Being new to the home ownership thing, I couldn't comprehend why someone would do that. I would pay the mortgage company $400/month for 120 months, and still owe the same amount as I originally financed? Beyond Bizarre.

I chose a conventional mortgage and am very happy with it.

[unblock]

8. in theory, you pay in later years

of course, there are many varieties, but generally, after 5 or 10 years of interest only, it converts into a regular (i.e., principal + interest) fixed rate or adjustable mortgage. the monthly payment will naturally be noticeably larger than when it was interest only.

in practice, however, primary interest only mortages are most popular with flippers, people who anticipate selling the house in a few years, before the principal payments kick in. this is useful if you are trying to make a profit on real estate, by finding an underpriced house and/or by renovating it and/or by straight speculation. but if it doesn't work out, you better be prepared for the increased payment one way or another.

as for secondary mortgages, on the other hand, home equity lines of credit are interest only, typically for 10 years, after which point it similarly converts into a straight principal + interest loan. the difference is that helocs are quite common (they work like credit cards, but the interest is usually tax deductible), whereas interest only first mortgages are not very common.