How Interest Only Loans Work?

You take out a loan to pay for a house. By putting money in monthly you are paying off the debt slowly by paying a combination of interest and principal. Principal is applied directly to the loan amount while the interest is paid to the bank.

Paying interest is not all bad because you can claim a tax deduction from it. Many people don't realize that and get scared away from big mortgages. But imagine cutting down the cost of your mortgage payment by about 30% and then determine whether you can afford the house comfortably or not.

Interest Only Payments vs. House Appreciation

If the appreciation of a home exceeds your interest only payment then you have absolutely nothing to worry about when doing this kind of a loan. But be forewarned that you will be in trouble if you are forced to sell within a short amount of time. Because agent fees totalling 6% coupled with closing costs are a big overhead, you stand to lose a lot of money if selling soon. Your appreciation would have to be at least 15% for you to stand to make money. In an upturn market, 15% is nothing. But for every 10 years, the trend has been the market is in an upturn for 3 years and stay stagnant for 7 years. If you are buying in a stagnant time period, be prepared to sell your home for a loss if you do not intend to live in the house for 7 years. Worst case of course. And it all depends on the market you are in.

Typical Programs that People Get

Homeowners tend to go for 3 or 5 year fixed interest only loan payments. The loan will then amortize for the rest of the 30 year term. This way the loan will end up being paid off in 30 years and will be approved and funded without issue. Many homeowners feel that because house prices keep increasing, they will be better off struggling for a bit in the initial 3-5 year period because the amount they owe on the house would be much less than the actual value at that point.