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How exactly do 'interest only' mortgage loans work? When do I pay on the principle of such a loan?

ronidl76 - 2007-05-17 14:02:37 - Renting Real Estate

I know APR loans are a bad idea, but how would an interest-only loan work? Would it still be a 30 year note, or do they extend the loan? Would I be able to get a fixed rate with an interest-only mortgage loan?

Best Answer:

In an interest-only loan or mortgage the borrower only pays interest each month. This makes it cheaper than a conventional mortgage, in which part of each month's payment goes towards the principal and part goes towards interest. These loans have become popular because the monthly payments are lower, allowing borrowers to afford a larger home. However, these loans can be dangerous, especially in a down housing market. The interest rates are generally fixed for the first 1, 3 or 5 years. After that, they convert to a conventional loan, with a higher monthly payment. Most borrowers take on these loans because they assume they will sell the home before the interest rate increases. In a down market, they may not be able to sell. If they cannot afford the increased payment, they may have to default on the loan, and foreclose on the home. So, when the rate starts to adjust, you would need to refinance again. And, either get a fixed or another interest only adjustable. And, yes, I do believe you mean ARM. Although, if you have extra money every so often, you can pay down the principal in extra payments.

Answers:

Every loan has an APR, what people refer to as "bad" is an ARM (adjustable rate mortgage). An interest only loan is usually amoritized over 30yrs. But yes, you are just paying interest only NOT paying anything towards your principal. If after 30yrs. of paying Just the interest on say a $100K loan,,,, after 30yrs. you would still owe $100K, at which time you would sell the home or just refinance. Most people do not pay interest only on the same loan for 30yrs. If you have an interest only loan, it is because you couldn't afford to pay the principal as well when you first got the loan. You should contact the bank who holds your mortgage note ask if you have a "pre-payment" penalty OR if it would be OK to make some payments towards your principal. If you're currently on an adjustable rate interest only loan, it would be better safer to refinance to a fixed loan payment. Even if it is interest only, just make sure you ARE able to, if you want, to make extra payments towards principal.

In an interest-only loan or mortgage the borrower only pays interest each month. This makes it cheaper than a conventional mortgage, in which part of each month's payment goes towards the principal and part goes towards interest. These loans have become popular because the monthly payments are lower, allowing borrowers to afford a larger home. However, these loans can be dangerous, especially in a down housing market. The interest rates are generally fixed for the first 1, 3 or 5 years. After that, they convert to a conventional loan, with a higher monthly payment. Most borrowers take on these loans because they assume they will sell the home before the interest rate increases. In a down market, they may not be able to sell. If they cannot afford the increased payment, they may have to default on the loan, and foreclose on the home. So, when the rate starts to adjust, you would need to refinance again. And, either get a fixed or another interest only adjustable. And, yes, I do believe you mean ARM. Although, if you have extra money every so often, you can pay down the principal in extra payments.

In an 'interest only' loan you never pay principal down at all, just pay interest only. when the loan term is over, you still owe the principal in full. These work best when you're taking out a short term loan to, say, rehab a house that you intend to sell for more than you bought it for, so that you can reap the profit. These loans aren't for the average person. These loans are for various terms, but usually short term (1-6 months, 1 year, etc) and are almost always fixed rate.

you can get a fixed rate of 1-30 years at interest only payments. the loan term remains at 30 years. so you can get a 5 year interest only loan based on 30 year pay back term. what this means is that the first five years you are required to make only interest payments. any amount more than that paid will get applied to principle. after the 5 year term comes up, the loan is still open but now your payments either adjust to the market at the time and/or your payments become principle and interest. Interest only loans are good if you get them fixed for 5 years or more. it helps make payments more affordable, but you never pay down your balance. if you ever plan on moving within 10 years, dont get a loan that requires principle and interest. if you know you will never move again, then go for a principle and interest payment as long as you can afford it.

The other answers are mostly correct, however no interest only loan product allows for interest only payments throughout the term of the loan. They are all limited to a pre set interest only period with 15 years being the longest period I am aware of. These loans can be fixed rates as well. The best one I know of is a 40 year loan term with the first 10 years being interest only. This basically allows you to make smaller payments for the first 10 years, then having a traditional 30 year fixed rate over the remaining 30 years. There are also no rules that do not allow you to pay towards the principal during your interest only period. Many people will take an interest only loan for the security of having a smaller payment when they need it, but paying extra to principle when their budget allows. Anything you pay extra applies directly to your principal balance which will ultimately reduce your payment once the interest only period is expired.