We took out what we thought was a 15 year interest only loan on a $68,000 home improvement.

We are looking at selling the home, we have very good credit and over a $350,000 annual household income so we can easily make the 1st, and home equity ($556 monthly) and we have been paying $1500 monthly toward the principle on the home equity.

We took the loan out in 2006 and I was sure that at the 7 year mark (like my first mortgage), it would convert to a conventional at the current interest rate at that time. (Our 1st converted to a conventional 30yr at 3% interest),

Instead, the original home equity from 2006 reads like a conventional loan at 8,9%fixed rate with a balloon payment in 2021. It breaks out as $69,000 principle, and $86,000 in interest. (179) payments at $556, and (1) at $56,000. The more I read, it does not appear to be satisfied if we simply paid off the principle so that we only pay the interest until the principle is paid off. It reads as if no matter what, we owe the entire amount of interest ($86,000) in full, even if we pay off the principle well in advance.

Is this type of loan legal?

They certainly were legal... what part of interest only did you not understand. Its pretty clear.

The scheduled payments ONLY covered the interest... nothing more... not one penny, you had to pay extra to pay down the principle. So yeah... at the end of it you owe the entire thing if you made no extra payments.

The entire point of them being your mandatory minimum was lower.. but you had to have the discipline to find extra to pay when you could.

My opinion is people that got those weren't too smart (yes I personally knew a few) because they were making a huge gamble. And when you gamble.. the possibility of losing is never far away.

I understand that that part is legal, but if I am able to pay off the entire principle (either through my own funds or by selling the house) say within the next two years, do I still owe the entire $86,000 in interest?

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Originally Posted by smoothy

They certainly were legal....what part of interest only did you not understand. Its pretty clear.

The scheduled payments ONLY covered the interest...nothing more....not one penny, you had to pay extra to pay down the principle. So yeah...at the end of it you owe the entire thing if you made no extra payments.

The entire point of them being your mandatory minimum was lower..but you had to have the discipline to find extra to pay when you could.

My personal opinion is people that got those weren't too smart (yes I personally knew a few) because they were making a huge gamble. And when you gamble..the possibility of losing is never far away.

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Without knowing where you are or whether the lender was a federal bank or state chartered lender, we can't say for sure. But I would tend to doubt that you can't pay the loan off by paying the outstanding principal.

By the way, your numbers don't quite add up. If you took a loan for $68K and agreed to pay interest only for 15 years Your payments should be $504/month with a $68K balloon. So it appears you didn't read the loan documents carefully before signing and your loan is different than what you thought.

So if we pay off the principle within the next few years, there will be no balloon payment due?

Without reading the loan documents I can't say for sure. I would contact the lender and tell them the house is up for sale and you wanted to check what the payoff balance was. If they give you a figure, you should be OK. If they tell you that you have to pay the full amount, then you need to consult an attorney on the legality. I do find it hard to believe they can charge future interest.

As Scott said... its all depends on what's actually in the loan documents... unless they put in a prepayment penalty.. you generally can... but it was so common to do it with certain lenders you can not make that assumption.

I read through it thoroughly today and it clearly states that there is no prepayment penalty.

AS I said smoothy, I thought it was an interest only, but as I am currently reading it, it reads as a conventional loan with an 8.9% interest rate with most of the interest ($86,000) paid up front, and then at the end of the 15 years, a balloon payment ($56,000) to completely satisfy the loan.

I am reading through and it says that there are no penalties for early payoffs so I am trying to get a clear understanding of exactly what I owe. I have the ability to pay this off within two years whether I sell it or not, so I just want to be sure that when I do this, I will not be on the hook for another $80+K in interest.

The lender says that it is an FRM network lender. It basically takes out the loan and then sells it to others to service. It is currently being serviced by CCO Mortgage.

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Originally Posted by smoothy

They certainly were legal....what part of interest only did you not understand. Its pretty clear.

The scheduled payments ONLY covered the interest...nothing more....not one penny, you had to pay extra to pay down the principle. So yeah...at the end of it you owe the entire thing if you made no extra payments.

The entire point of them being your mandatory minimum was lower..but you had to have the discipline to find extra to pay when you could.

My personal opinion is people that got those weren't too smart (yes I personally knew a few) because they were making a huge gamble. And when you gamble..the possibility of losing is never far away.

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As I said, the math doesn't work for an interest only loan, so I suspect you have been paying a small amount towards the principal. Do you get a monthly statement? The monthly statement should show how much of your payment was applied to interest and principal. Or, at least, the principal balance.

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Originally Posted by ScottGem

As I said, the math doesn't work for an interest only loan, so I suspect you have been paying a small amount towards the principal. Do you get a monthly statement? The monthly statement should show how much of your payment was applied to interest and principal. Or, at least, the principal balance.

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Yes it's like $77 toward the principal and $479 toward the interest, but that's no longer my question. My question is, once I payoff the principal do I owe anymore interest? In other words, Am I on the hook for the entire amount of interest from the origination date of the loan (including the balloon payment at the end) if I pay off the principal well before the end of the 15 year term?

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Originally Posted by ACAGENCY

Am I on the hook for the entire amount of interest from the origination date of the loan (including the balloon payment at the end) if I pay off the principal well before the end of the 15 year term?

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And, again, we can't answer that without knowing exactly what the document says as well as what local laws are. But I would be very surprised if it included future interest.

Okay thanks

If the note says that there is no prepayment penalty then you can pay off the loan at any time and you will not be responsible for any further interest payments.