Have you heard that commercial about interest-only mortgages...the one where you’re told about what a wonderful benefit it is to have a low, low mortgage payment and all the wonderful tax write-offs you will receive?

Before you decide to buy now and pay later, that is pay “big time” later, take a moment to enlighten yourself a bit more about these so-called “interest only mortgages.” Think about it for a moment. If you just pay the interest on your home, will you ever start paying on principal and will you ever earn any equity into your property?

By definition, a mortgage is a temporary, conditional pledge of property to a creditor as security for performance of an obligation or repayment of a debt. Simplified, that means you borrow money from a financial institution and they essentially buy your house and you pay it back. How can this happen if you’re just paying interest? More accurately, interest-only mortgages are a temporary reprieve for paying off a traditional mortgage. You may actually be prolonging the inevitable and eventually making it even more costly to pay off your mortgage.

Far too many people are in debt way over their heads because of interest-only mortgages. They took advantage of attractive offers to buy now and pay later. With an interest only payment you’re keeping the principal at minimum value while continuing to pay interest at 100%. With a more conventional mortgage you’d be slowly dwindling down the total interest amount.

Most interest-only payment schedules are offered on Adjustable Rate Mortgages (ARMs), but they can also be found on a fixed rate mortgage. Interest-only payment periods almost never run for the entire term of the loan which is typically 15 or 30 years. Depending on the terms of your contract, you could be expected to start paying on the principal in five, seven or ten years. Once the interest-only period ends, your monthly payment will go up because then you’ll be paying on both principal and interest.

Conversely, interest-only mortgages can be a good thing for some people. For those people wanting to purchase a bigger/better home for a lower down payment AND who anticipate moving within seven years, the interest-only payment method may be the way to go. However, keep in-mind that in a "down" realestate market you generally won’t be building equity and making money by doing it this way. The majority of the money made from investing in real estate comes from an increase in value to the home. The average person moves every seven years anyway. Gone are the days when people stay in a home thirty years. Hence, if you anticipate moving before you’ll have to start paying on the principal, then an interest-only payment may be ideal for you.

There’s a great deal of fine print to any mortgage. Evaluate your own goals; be vigilant when reviewing the terms on the loan you’re considering before acting.
Courtesy - eMortgage

I agree with the last part. This cannot nor should not be used as a blanket statement. If you are on an interest only loan in an appreciating market, especially Arizona which appreciated at a rate of 48% in 2005 as a whole, you are actually gaining a lot of equity. Keep in mind also the way a 30 year fixed is amortized, you are paying primarily interest only the first 5 years anyway with very little going toward principal. Typically a person stays in a residence on average, 7 years.

Right. If you are in an appreciating market with low rents, and you are buying an investment home which you are going to rent out... Hello? What is your best option?
My personal opinion remains, though, that your loan with the interest-only option should definitely be a fixed rate loan, though.
--A

"My personal opinion remains, though, that your loan with the interest-only option should definitely be a fixed rate loan, though. by upscaleLV


WOW!! and you base this off?? To many factors you have not delved in to in your generalized post. You haven't given any specifics. What do you base this on? Give me:

LTV/CLTV
Purchase or Refinance (Cash Out or Rate & Term)
Sales Price and/or Appraised Value
SFR, Condo (low or high rise), 2 - 4 fam, 4 plex
Primary, Investment, 2nd Home
DTI (front and back end)
FICO (mid)
Doc Type: Full Doc, SIVA, SISA, No Doc, Limited Doc, Asset Only, or No Ratio
Gross Monthly Income

Is it a PUD?

Are you self employed?

How long with same company?

Are you Salaried or Commissioned?

Do you receive bonuses or overtime?

Have you been receiving them for at least 12 months?

Do you receive any other type of income? (alimony, child support, social security, retirement, etc), if so, how much?

Do you have any stocks, bonds, mutual funds, IRA's? With whom and how much?

What is your current monthly housing expense?

How long have you been at that residence?

Do you rent or own?

Do you own any additional properties?

Any 30, 60, 90 day lates within the past 24 months? If yes, are they rolling?

How many open trade lines? Over 24 months?

Overall monthly debt payments?

Any outstanding judgments, collections?

Filed BK within the last 7 years?

Are you obligated to pay allimony or child support? If so, how much?

How long do you plan on staying in this residence? (If primary)

What are your ultimate financial goals within the next five years?

AZLender, your post is great, and I am lazy so i will not even try to post something as long. Anyways I agree with AZ. The thing that blows me away is all you hear from people is that Interest Only loans will destroy people. I do not understand how that statment can be even remotley true except for the fact that it gives the news something tho scare people with so they will stick around during the commercial break.

Run an amortization sheet on any loan amount at any interest rate you pick, and look at how little principal is actually paid off in the 1st 5 to 7 years. The answer is not very much. The issue with any loan Principal and interest or interest only is are you in a depriciating market or not. If you are than it does not matter what type of loan you are in. You will be going upside down no matter what the factor is. To make an impact on the principal you will have to be an any loan for quite some time if you are making the minimum payments. Most buyers make thier money in apperication over the short term. If you consider most people sale or changge loans e4very 5 to seven years. No matter what loan a borrower takes it is our responsibility to give proper education of how to make the loan benefit the borrower.

Just becasue the loan is Interest only does not meant the borrower cannot make principal payments. One of the most common refinances I see is when the borrower insisted on a 15 year fixed rate laon even though it was not right for thier financial situation. Then 3 years into the loan the get laid off from thier job or something bad happens and they are short funds to make that obligation. AZ will agree that if the borrower had taken a loan with a smaller monthly obligation in the 1st place thay would have been fine. I always try to coach my buyers to take the smallest monthly payment and pay extra each month on their own.

Just my 1.5 cents, and I still ended up typing a novel. I quit! (+=

Wow, AZ... You've got to consider the source. A real estate agent gives a personal opinion on a loan. This must be a touchy subject for you.
--A

""""The thing that blows me away is all you hear from people is that Interest Only loans will destroy people. I do not understand how that statment can be even remotley true except for the fact that it gives the news something tho scare people with so they will stick around during the commercial break. """"

I agree, there is too much hype about how IOs destroy people. Everything should be considered.
But that everything includes the fact that THIRTY OR MORE NOTICES OF DEFAULT ARE RECORDED EVERY DAY in my market. Every single day.
OK not weekends.
--A

That's just it. You're not taking in to consideration all the mitigating factors which would constitute the type of loan in which would be in a specific persons best interest. They are based on a case by case basis, as it varies from one person to another.

LV, we posted at the same time. This was in response to:

"Wow, AZ... You've got to consider the source. A real estate agent gives a personal opinion on a loan. This must be a touchy subject for you.
--A

"But that everything includes the fact that THIRTY OR MORE NOTICES OF DEFAULT ARE RECORDED EVERY DAY in my market. Every single day.
OK not weekends." UpscaleLV

the default issue is a scary thing, but i believe that it comes from peoples lack of respect for the privilage of getting credit. To often people pay bills on thier schedule with little or no regard to who they borrowerd from. That issue is just a ridiculous view of our society as a whole. There seems to be no such thing as a starter home anymore. If it Doesn't hava a 2 car garage, super kitchen, walk in closets, Jaquzzi bath tub than peolpe dont want it. Same goes for vehicles. I can't tell you how many applications I take where the borrower in my market will freak out over a $800 to $1000 mortgage, but has no issue driving a $450 car payment around each month. It used to be that you had to save and work hard to get nice things, but now people assume they owed it. Sad!

If this were a perfect world, everybody would qualify and afford the payment on a 15-yr or 30-yr fixed mortgage, everybody would have a 850 FICO score, everybody would only have two credit cards used solely for emergency, everybody would pay their bills on time, everybody would pay their balances in full every month, everybody would have a saving account, a 401K...and everybody could afford to buy a home no matter which market they lived in and no matter which amount of income they brought home.

Only good things would happen in life too...no divorces, no long-term sicknesses, no loss of jobs, no ridiculous gas prices, no inflation, and I could go on and on...

If anyone of you live in such world, let me know coz I'm willing to pack my bags RIGHT NOW.

Mortgage lending is not a cookie cutter industry and neither is real estate. It is all about meeting our clients real estate AND financial needs. I guarantee that if any of the mortgage professionals who have posted a reply to this topic were to sit down with a borrower, that borrower would be in good hands. No two loans are alike and no two families' financial situations are alike either. Every loan program has pros and cons; however, it doesn't mean that one is necessarily better or worst than the other. The list of questions that AZ has posted is only a fraction of what helps us determine which solution would be best for the borrower's OWN CIRCUMSTANCES...sometimes an I/O program is the only payment they can afford RIGHT NOW meaning at the time of the application.

The lending industry has evolved dramatically over the last 20 years in terms of loan program made available. Pay-Option-ARMS and neg-ams still remain very popular loan programs even though the market has changed and these types of loans are the riskiest loans available today.

Our job is to educate our clients as much as it is provide them with affordable options but ultimately the decision is theirs to make. Since we don't live in a perfect world, compromises will have to be made. It's compromising long-term stability at the expense of affordability.

AZ... I don't make a practice of educating my clients on every mortgage option. Coversely, I don't make a practice out of telling people not to get IO's unless they are at a fixed rate. That's your job.
I was just sharing my opinion on this forum about which I think is a better choice.
I defer to you and your expertise on why various products fit various situations.
--A

Ultimately, your preference UpscaleLV would be the ideal scenerio as applied to I/O options. I think we all agree with you on that. Unfortunately, not everyone qualifies or can afford the payment on a 30-yr fixed.

"I defer to you and your expertise on why various products fit various situations."

All I've got to say to that is THANK YOU for valueing our expertise as much as we, LOs, value yours.

UpscaleLV,
From an investor point of view you are right on! An interest only loan will give your property an increased cash flow. Also if the property has minimal appreciation and you plan to 1031 the property in at most 7 years then an interest only is in my opinion the best way to go.

Note to you LO's and Mortgage Brokers out there I am talking strictly for an investment property.

Very good point partner! From an investor's point of view, cash flow is what truly matters therefore, finding the loan program with the lowest payment becomes the priority. Neg-ams in that instance can be very beneficial to an investor.