[oyenike]

What are the pro and cons of an interest only home loan?

[ScottGem]

what are the pro and cons of an interest only home loan?

First, unless your post is directly releated to the thread, its not a good idea to add a question in an existing thread. You should start your own thread (I'm putting in a request to move this to a new thread).

There is no such thing as an interest only loan. At some point you will have to pay principle. There are loans where you can pay interest only for a time. The advantage to this is a lower monthly payment during that time. The disadvantage is that ti will cost you much more in interest over the course of the loan.

[NeedKarma]

Another disadvantage is that you accumulate no equity in your house. Equity being: "the resale value of your home is not the only value your home contains. When you purchase a home and make payments on your home mortgage, you start building what is called home equity. Home equity is the difference between the current resale value of a home and the amount still owed on the mortgage. As the principal of the mortgage amount decreases as a result of monthly mortgage payments, the home equity increases. " (source)

Should you decide to sell your home and the market value has decreased in any way (as it is these days) then your are faced with covering that difference.

[Dr D]

While I am not a great fan of Interest Only loans, they can be used by a prudent borrower in specific situation. The early crop of IO loans had the rate fixed with the IO for a period of 3, 5, or 7 years, at which point they turned into a 1 year adjustable (risky for the long term). Now FNMA offers a fixed rate 30 year loan with the IO option for the first 10 years. Such loans can work for the borrower who plans to remain for the short term; or the borrower who will pay off debt during that time, or may have a large child support etc. obligation that will be gone in 3 or 5 years. Unfortunately, most people, spend this extra disposable income on new cars, boats and other neat stuff, without any thought to the future. There will be many forclosures in the future because of these, and especially the "Pay Option ARMs", in which the minimum payments are set at an atificially low level by negative amortization (where unpaid interest is added to the principal). I hope this helps.

[Dwight_Pigg]

Dr D is right on! I have counseled people to never use an interest only loan to buy "more house" than they could otherwise afford. The 30 year fixed is by far the least risky. Dr D has given some excellent reasons to consider an interest only. I would only add one more.
Many of my clients have gone on an interest only and invested the difference; in other words, the portion that would have gone to pay principal. You must be disciplined to this.
If you save $300 per month by paying I/O on a $200,000 loan, you would invest that $300 every month. If you can average a 10% return, you would have $62,778 at the end of ten years.
During this same period, you would have paid only $30,449 in principal on a traditional 30 year loan.
At this point, the loan would amoritize the balance over the remaining 20 years. You could pay $30,449 to principal and keep the same payment for the remainder of the loan, while keeping more than $32,000 of your investment money! There are a lot of other options available to you as well.
Here are some other benefits to think about:

1. During that 10 year period you are very liquid. If you have an emergency or are unable to work for a period, you have the cash reserves to take care of it.

2. There is nothing to stop you from paying extra to principal. I have had some clients do this and apply their income tax return to principal every year. If your average refund is $3000 each year, your principal is reduced the same as it would have been on a traditional loan, while banking 62K!

I could go on and on with more ideas, but I think that you can get the idea. Bottom line is don't go I/O if you lack the disipline to responsibly invest the savings.

I hope that helps!

[wildcatgirl]

I agree with everyone's posts on this matter--IO loans are only good if you plan on only living in a particular home for a short amount of time (less than 5 years) and you know that the value of that home is going to increase dramatically within that time. Now, unless you are a fortune teller, I would say that an IO loan is a very bad choice. You not only may not be able to sell the home for what you owe on it, but if you re-finance, chances are the rates are going to be higher in the future.