Quote:
Originally Posted by kork13
Just for my own understanding, what exactly is meant by an 'interest only' payment? Basically that you pay all of the interest upfront at the start of your loan? I know that many companies, like for car loans, set the payment schedule to do similarly to this, where the first pmt is 70% interest, 30% principal, 20th is about 50/50, 59th is about 5% interest, 95% principal. But this sounds different... is there actually any benefit to the owner by doing an interest-only loan like that? If not, why do it?
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No, that is a standard front-loaded loan. An interest-only is where the buyer only pays the accumulated interest each month, so none of the payment goes towards principal. No equity is built up by paying the mortgage. There is usually a balloon payment due at some point down the line (principal due in full) so the expectation is that a sale or refi will occur before then. During the boom days of real estate this was pooh-poohed since the rising value of the home created equity without any work by the mortgage holder. Of course it works the other direction just as well.
The interest only loans were sold as a way to afford more house with the same payment. A lot of them give you the option to pay on the principal if you want. But of course what did most people do? Buy more house than they could afford and were barely able to make the interest only portion of the payment.