Can anyone tell me the difference between interest only and fixed rate mortgage rates?
March 15th, 2010 | 
Author: I’ve bееn hearing a lot аbουt thе “benefits” οf interest οnlу mortgages, bυt I’m nοt 100% convinced thаt thіѕ іѕ thе way tο gο. Thеу ѕау thаt people ѕhουld gеt interest οnlу loans аnd рlасе thе remainder οf whаt уου wουld normally pay (οn thе finance) іn ѕοmе type οf investment. Shουld уου υѕе уουr finance lіkе thіѕ, οr ѕhουld уου pay thе finance οff quickly???
Posted in Mortgage FAQ
if we are talking about the same type of loan, an interest only loan means you are only paying the monthly interest on the loan and none of the principle.
So if you have a 100k loan you are just paying the interest rate on that 100k and not really paying off any of the 100k. So your not really paying off your loan. In theory your only “renting” the 100k in anticipation of you start paying off the principle
If anyone tells you to get an interest-only loan, run away, and scream like a girl for effect.
An interest only loan never pays down the principle. Which is terrible in times like these, with the value of real-estate dropping. You can get upside down on the house pretty quick.
Fixed rate means the interest rates never changes. If it’s 5% today, it will be 5% in 20 years. Your payment never changes.
Adjustable rate loans stay fixed for a period of time, usually 2-5 years, depending on the loan, then vary annually, depending on the Prime Lending Rate. If the PLR is up, your rate will increase (the annual increase/decrease is capped at a couple of %, depending on the loan). Your payment varies.
If you are buying a place that you will only have for a few years know this for sure), then an adjustable is fine. The initial rate is lower than a fixed rate, so your payment is less.
I have gotten 4 mortages in my life. Everytime, I have gotten a fixed rate.
Oh, just so you know, it’ll cost you $5,000 to close on the house. It’s called “closing expenditure” (for obvious reasons), and from my POV, they are a total rip-off. They make plenty on the interest of the loan, but I’ll stop before I start to rant.
Excellent luck.
Interest only mortgages are a excellent way for people to buy more than they could otherwise afford. HOWEVER, using this type of loan you pay only the interest on the amount borrowed and do not pay down the debt you’ve incurred. In other words, you don’t see the benefit of paying down the debt – you don’t gain additional value justice by paying off the loan.
In an appreciating real estate market, and at the end of the loan term, you’ll have more vital real estate but less to show for it. The entire amount of the loan will be due and you’ll only get the difference between the loan amount and the sale price. In a traditional loan you could take advantage of the market by paying off the loan AND realizing profit from justice buildup. In a declining market, you’ve lost money – from paying the interest on the loan and from falling real estate prices. Then what do you have to show for your investment?
To the theory that you could invest your money elsewhere – that’s always an option. As an investor you have to determine where you will get the best restore on your dollar. Traditionally, real estate doesn’t appreciate as quickly as other investment vehicles, but, it often doesn’t come with the risks of other investments. Only you can judge your tolerance to risk.
Lastly, because real estate tends to be a stable investment, you would be better served to pay down the debt as quickly as possible. The number crunchers will often tell you that by making 1 extra payment a year on a traditional 30 year home finance will take 8 years off the loan. This more dependent on prevailing interest rates, but the end result is the same. You will see accelerated justice buildup and will lower your debt load over time. This is the best way to go, provided you can afford it.
http://www.lendermark.com/interest_only_advantages.htm
Interest only loans are fantastic loans if you plot to go within three years, as long as you are living in a city with appreciating values.
Example: $200k 30 fixed at 6 1/2% interest = $1264 +tax & Ins.
$200k 5year arm 6% interest = $1000 + tax & Ins.
On a fixed rate you are paying around $50.00 principal
You could add $50.00 to your interest only payment which will apply the same amount of principal as a fixed rate and your still $200 a month ahead.
Much depends on your credit score.
As long as you do not have any forestallment penalities you sell any time you choose.
You still get a fantastic tax write off on the interewst paid, and you could get up to 30% back on your taxes.
Have someone THAT KNOWS what they are doing show you paper.
For the young buyer of today, its the best way to go,